bne -

With stock markets tanking around the world and worries that we are now entering "Meltdown: Part 2", here's a reminder for investors in emerging markets of Citigroup Global Markets' useful "Contagion Index".

Investors remain worried by three main channels through which the crisis could arrive on Emerging Europe's shores: public sector debt/financing, the banking sector and the real economy/trade.

Looking at the debt/financing angle, Emerging Europe is not facing a solvency crisis like many countries in the Eurozone; save for Hungary, debt is much lower than in the Eurozone, at around 40% of GDP at present - half the average for the EU as a whole and significantly below the likes of Greece at 145%. Even so, while the solvency of the region's governments is not in doubt, high external financing requirements mean the region is vulnerable to a fresh liquidity squeeze.

The region is probably most vulnerable through the real economy/trade channel. The relatively strong recovery of the economies of Emerging Europe compared with their western peers has been almost entirely driven by the resurgence in exports to western Europe, particularly Germany, rather than from any improvements in domestic demand.

However, the potential for the euro crisis to spread to the region's banking sectors poses a far more dangerous channel of contagion, which could ultimately tip some economies in Emerging Europe back into recession and - in the extreme - require fresh bailouts from the International Monetary Fund (IMF), analysts warn.

Citigroup's index tries to present a picture of the vulnerabilities that will emerge if the Eurozone starts to produce more contagion than witnessed so far. The index is made up of indicators of each type of contagion already mentioned: i) the ratio of liabilities to European banks as a share of reserves; ii) the debt/GDP ratio; and iii) the contribution of exports to the Eurozone to GDP growth.

In addition, Citigroup adds two further indicators that would become relevant during a more general fall in risk appetite: i) the size of each country's external financing requirement and ii) the share of non-FDI capital flows as a percentage of GDP.

Putting these variables together into a "Contagion Index", it appears that Hungary, the Czech Republic, Poland and Turkey are most at risk if the Eurozone crisis spreads beyond the periphery. Russia is probably least at risk.

On almost every measure of contagion risk, Citigroup says Asia seems to have little to worry about, with China and South Korea propping up the bottom of the table with Russia.