Reverse contagion

IN THE old days, banks in the rich world lost money after lending too much to the global South, which then affected their ability to make loans at home and to other poor countries. Now, thanks to the ongoing crisis in the euro zone, we are witnessing a new phenomenon, where banks that lose money in their home markets withdraw from otherwise profitable activities abroad. The latest quarterly review of the Bank of International Settlements (BIS) shows that the turmoil in Europe can be blamed for a significant contraction in cross-border lending to emerging markets since the middle of 2011. The biggest victims are the peoples of Eastern Europe. Call it a case of reverse contagion: According to our estimates, the importance of home country factors increased sharply during the downturn in cross-border bank lending that took place in the second half of 2011. During this period, ...