Necks are craning eastwards to spot the next stage of the global financial crisis. As fears of a full-scale economic crash in eastern Europe batter already frail investor confidence, new concerns are growing about the financial repercussions for Western banks, many of which are highly exposed.

There's been a decade of boom in the so-called emerging Europe region, with rapid growth fuelled by Western investment. The credit binge is turning into a violent hangover.

The International Monetary Fund has cut its 2009 "growth" forecast for central and eastern Europe to predict a contraction of 0.4%.

The markets already think eastern Europe has lost its lustre. Hungary's stock market is down 14% so far this year and the Czech Republic's has fallen 24% over the same period.

Currencies are falling too: Polish ministers were forced to sell euro reserves this week to prop up the zloty after it hit a five-year low against the euro, which itself fell against the dollar.

The rest of the world is dealing with its own financial malaise, so eastern Europe's exports have slumped and there's a lack of foreign capital.

Banks are struggling to fund growing deficits while trying to ward off runs on their reserves. Analysts believe eastern Europe might face a crisis worse than that of Asia in 1997.

The matter came to a head this week when Moody's and Standard & Poor's, the credit rating agencies, warned that western European banks with eastern European subsidiaries might soon face downgrades. Western banks have lent $1.74 trillion (£1.22 trillion) to the former Soviet bloc, including $1 trillion of foreign loans and $700 billion in home currency debt through local banking subsidiaries.

Moody's outlined concerns about the safety of those funds, saying there had been widespread deterioration in the area's economic health.

The European Bank for Reconstruction and Development predicts that eastern Europe requires as much as €400 billion (£358 billion) to re-finance loans and kick start its banking system. Dominique Strauss-Kahn, head of the IMF, has said he is waiting for a second wave of countries to come knocking after earlier bailouts of Belarus, Ukraine, Hungary and Latvia.

Tracing the origins of those billions brings a rare bit of good news for Gordon Brown: Britain's beleaguered banks might avoid the brunt of this particular mess.

"British banks don't seem to be exposed to eastern European countries, they avoided investing in the area, and don't trade with these countries as much as their Continental counterparts," said Professor Kate Phylaktis, director of emerging markets at London's Cass business school.

"Britain is on the periphery now, but the current situation does impact our relationship with the eurozone - it's convincing evidence that we were right to avoid joining the euro."

Among the eurozone nations, Austrian banks look to be the most endangered, with €278 billion - over a quarter of the country's gross domestic product - exposed to emerging Europe. Raiffeisen bank has 54% of its assets tied to the region.

Other eurozone institutions will be hit. Banks in Ireland, France, Italy, Belgium, Germany and Sweden have significant exposure to eastern European economies. Allied Irish Bank, Holland's ING and France's Société Gé*érale have all seen share prices dive as investors worry about capital the banks invested in the region. World Bank president Robert Zoellick yesterday asked for a European Union-led response to support the region's economies. Eastern European leaders have also called for help. But within the EU there are concerns about a one-size-fits-all solution.

A lack of action will cause lasting damage, according to Manik Narain, currency strategist at Standard Chartered. "Everyone has focused on the effect of the world's macroeconomic problems, but the impact of falling oil has been overlooked. When the price of oil was going up, a lot of exporters invested in western European banks, who used their increased deposits as a basis to extend credit to eastern European subsidiaries.

"Now they might well be looking to get their deposits back. If they do, the impact will be significant. Unless the EU provides some kind of support, the effects could be worse than Asia."

Asia is a frequent point of comparison. Lars Christensen, the analyst at Denmark's Danske Bank Group who predicted Iceland's collapse two years beforehand, said: "This looks like a market meltdown on the same scale. The markets have decided the region is the subprime area of Europe and everyone is running for the door."