Citigroup Global Markets developed a way of measuring the impact of the eurozone crisis on emerging Europe with its “Contagion Index,” reports The Financial Times. 

Investors identify three main channels through which the crisis could spread to on emerging Europe: public sector debt/financing, the banking sector and the real economy/trade. In addition to these three factors, Citigroup adds two further indicators that would become relevant during a more general fall in risk appetite: 1) the size of each country’s external financing requirement and 2) the share of non-FDI capital flows as a percentage of GDP.

Putting these variables together into a “Contagion Index,”  Hungary, along with the Czech Republic, Poland and Turkey, is most at risk if the eurozone crisis spreads beyond the periphery. On a scale of 0 to 1, with 1 being the highest degree of vulnerability, Hungary received 0.65 – the highest in the region.

Looking at the debt/financing angle, emerging Europe is not facing a solvency crisis like many countries in the eurozone. For Hungary, debt is 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%. However, while the solvency of the government is not in doubt, high external financing requirements mean Hungary is vulnerable to a fresh liquidity squeeze.

Hungary as well as the rest of the region is probably most vulnerable through the real economy/trade channel, says Financial Times.  The recovery of the economies of emerging Europe 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 Hungary’s economy back into recession and – in the extreme – require fresh bailouts from the International Monetary Fund (IMF), analysts warn.