Although big economies in Europe continue to dominate the headlines, a number of smaller nations are also in a great deal of trouble. Chief among them is Hungary, a small central European nation that has been dealing with one emergency after another since the financial crisis first began. In fact, the national currency, the forint, has fallen by almost 30% since 2008 when Hungary was first touched by the situation. While normally, this may not be that disastrous of a situation—as the export industry can speed ahead—it has been a near death-sentence in Hungary’s case.

That is because many of Hungary’s citizens, thanks to cheap loans denominated in foreign currencies, such as the franc and euro, went on a debt binge. While this may have been fine when the global economy was chugging along, the sharp devaluation of the forint has made many of these loans nearly impossible to pay back, forcing many Hungarians to seek bankruptcy protection or at the very least, cut back on spending. This has had a ripple effect down the economy, leading growth levels sharply lower and cutting tax revenues to the government as well.  Thanks to this precarious situation, credit ratings agencies have threatened to cut the debt of Hungary down to junk, forcing the nation to seek another bailout from the IMF, the second in about three years.

This marks a huge reversal for the nation as many were extremely dissatisfied with the first bailout which only led to reduced spending, high unemployment, and sweeping austerity measures across the economy. Nonetheless, the country is running out of options and seems somewhat desperate to stop the slide in the national currency and to turn around investor perceptions of the nation. Time is certainly running out, especially considering that the government cancelled a debt auction of short-term bills recently in light of the market events and the lackluster investor demand.

The only hope now appears to be a fresh lifeline from the IMF in order to help restore some semblance of investor confidence in the struggling country. “We believe a new IMF program could have several benefits, including the provision of fiscal and external financing, or the option of it,” ratings agency Fitch said on the subject. “It could also boost market confidence and introduce more transparency and consistency to policymaking.” With that being said, given that this is already the second time around for the nation in terms of bailout programs, there is still some skepticism as to whether this program will work this time. “Even if a deal were agreed, the potential for reform fatigue, a track record of unpredictable policymaking and a desire for asserting national independence could make it challenging to stick to an IMF program,” Fitch said.

Fortunately for investors, there is no Hungarian ETF at this time, as undoubtedly, the fund would be one of the biggest losers so far in 2011. However, Austria, a traditional partner of Hungary, has been especially hard hit by the nation’s crisis thanks in large part to Austrian financial institutions and their heavy involvement in the country.  This has made the iShares MSCI Austria Index Fund (EWO) one of the single biggest losers in the ETF world so far this year. EWO has fallen by nearly 40% on the year and a closer look at the holdings reveals why; the top sector is financials. Further to this point, two of the fund’s top ten components are banking institutions and both of these securities have lost more than 60% this year alone.

These massive losses, coupled with fears over bank recapitalizations and more turmoil in the region, have pushed many investors out of the country despite Austria’s relatively sound financial position. In fact, Austria is currently rated ‘AAA’ while debt is projected to peak at 75.5% of GDP and the budget deficit is expected to recede from the 3.2% level sometime next year. Nevertheless, the specter of further losses in the large banking sector has pushed investors out of the Austrian ETF, leading the fund to steeper losses on the year than products targeting Italy (EWI), Spain (EWP), or even the European Financial Sector (EUFN)

This brewing Hungarian crisis should also show investors that the risks are not just in the large European economies of Spain and Italy, nor are they in exclusively in euro zone economies such as Greece. Instead, contagion can spread beyond the common currency bloc and infect relatively strong nations, such as Austria, in that way. In other words, although a national economy may appear to be strong on the outside, a closer look at some of its biggest components and where their exposure lies can often times reveal a financial system that is facing severe problems. The only good news is that should Hungary manage to bottom out in the near term, especially if a new IMF program takes hold, the Austrian ETF could be due for quite the bounce back in 2012. Many of the other companies in the fund are relatively strong and solid ties to other powerful economies such as Germany could suggest to many that the nation’s fund has been oversold so far this year. Either way, EWO looks to be a fund to watch in the near term, as the product could continue to serve as a barometer for the central European region going forward in these uncertain times.

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