The Viennese pride themselves on having turned back the Ottoman invasion of Europe at the city’s gates after a famous 1529 siege. But these days there’s a new threat coming from the East: billions of dollars in potentially bad loans Austrian banks gave out to their former Communist neighbors.

Austrian banks have outstanding loans in Central and Eastern Europe totaling some €200 billion Euros ($273 billion), an amount equal to 70 percent of their country’s gross domestic product (GDP). With the world financial crisis hitting that region particularly hard, there have been fears that a tidal wave of bad loans could overwhelm Austria’s banks, possibly pulling the country itself into bankruptcy.

The government here has already spent €100 billion ($137 billion) to shore up its banks, guaranteeing loans and refilling their depleted coffers. In December, it nationalized Hypo Group Alpe Adria, a Klagenfurt-based regional bank overwhelmed by bad loans to clients in the Balkans, for fear a collapse would endanger the rest of the sector. In the event of a regional meltdown, it is unclear if Austria has the resources to save its highly exposed banks.

“We don’t yet know exactly how the East European countries will overcome the crisis, because they got hit very strongly,” says Franz Hahn, a financial macroeconomist at the Austrian Institute of Economic Research. “Everything is happening in the dark, so we can only hope that there isn’t a monster hiding there.”

Through the 1980s, Austria’s banks were sleepy places in a city on the periphery of European events. But the collapse of the Soviet Empire changed all that, opening new opportunities in lands that were once part of Imperial Austria’s empire. Austria’s banks moved in a big way, taking advantage of their cultural, historical, and geographic proximity to seize an outsized share of the banking opportunities in Hungary, Czechoslovakia, Poland, Slovenia, and other countries.

The bankers boldly invested in the region’s many unmet needs, providing loans to manufacturers and real estate developers and buying up local banks, where they introduced East European customers to credit cards, mortgages, ATM cards, and small business loans.

But many of those investments became vulnerable when crisis swept the world financial system in the wake of the collapse of New York-based Lehman Brothers in September 2008. Hungary and Latvia had to be rescued from national bankruptcy by the International Monetary Fund, export orders plummeted, national currencies weakened against the Euro, and the newly jobless fell behind on their mortgage and credit card payments.

Austria’s banks have been under close watch ever since, with some recalling that a similar chain of events brought down Vienna’s Creditanstalt in 1931, an event widely credited with sparking the Great Depression. In the spring of last year, analysts were warning that Austria was itself at risk for national bankruptcy, including Nobel laureate Paul Krugman.

Last July, the Organization for Economic Cooperation and Development warned that the financial system was still at risk from its exposure in Eastern Europe and that contingency plans “should be kept at the ready to deal with any downside risks.”

But even in the aftermath of the latest bank nationalization, some experts are now cautiously optimistic that the worst will not come to pass. “The fear was that this region would be like Asia in 1997, a crisis that would bring everything down,” says Krzysztof Rybinski of the Warsaw School of Economics. “Those fears have been completely overblown.”

Indeed, Austria’s banks say the situation has always been less dire than supposed. The region, they point out, did not have a financial crisis of its own, but rather has been suffering from the economic downturn. “We don’t have a problem with toxic assets,” says Michael Mauritz, a spokesperson at Erste Bank Group, which controls subsidiary banks throughout the region. “The banks finance the real economy: real people and real companies that produced real goods. There are no fancy products.”

“The problem we face now is that consumption and production are going down,” Mauritz adds. “But dealing with a downturn in an economic cycle is what we are here to do.”

“The situation regarding the Austrian banks’ exposure in Central and Eastern Europe was exaggerated,” says Raiffeisen International spokesperson Michael Palzer. “We will be faced with still increasing numbers of non-performing loans, but we believe we will manage the situation and are on our way out of the woods.”

But Mr. Hahn at the Austrian Institute for Economic Research isn’t as certain. The worst affected countries have been shored up by emergency aid from the IMF and other international institutions, but it is unclear if they are really stabilized. “Our assessment is that the risks are still there,” he says. “The Austrian banking sector may be a little over optimistic in this respect.”

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