By Paul Baiocchi

It seems like just yesterday Eastern Europe was knocking on the door of the BRIC economies, looking for a place at the table with the globe's hottest investment destinations. After all, in 2007 the region attracted more foreign investment than any other place on earth, including Brazil, Russia, India, and China. Fast forward to today and you have a region that sits on the precipice of economic calamity.

When global liquidity was at its peak and investment dollars were searching for high return destinations, Eastern Europe provided an ideal opportunity, especially for European Banks. Relative interest rates in the region were high, stoking the fire. In addition, the region boasted hearty growth rates and strong export demand for its goods, two factors which justified large bets by European investors, mostly in the form of bank debt. The risk appetite was never higher and the profile of Eastern European economies fit right into this mentality. Wherever there was returns to be had investment capital would flood, and flood they did.

Meanwhile, the risk reward picture of the region belied the leverage the region was enabled to undertake and when the global economy shifted on a dime, the fundamentals of Eastern Europe began to deteriorate quickly. Demand for exported goods in Europe, its largest market, began plummeting. Currencies of lowly-rated economies began to fall relative to the currencies in which most of the region's bank debt was denominated. Investment dollars began fleeing these countries like a crowded theatre in which someone yelled "fire." The capital flight and currency depreciation combined with increasing debt obligations are crippling these fragile economies.

At the private level, individual debts have exploded as well, as cheaper borrowing costs in Western Europe induced heavy consumer borrowing. With currencies such as the Polish Zloty at 5 year lows relative to the Euro, debt service costs are skyrocketing. Combine this with burgeoning unemployment in the region on the back of slackening demand for manufactured goods in Western Europe and the private sector, both at the enterprise and consumer levels, is in dire straits.

The question moving forward is how long can Eastern Europe's weakness continue and at what point does it start to induce action from the ECB? Some have wondered whether those countries which have been newly-admitted to the EU should be cleaved altogether. Others are imploring Trichet to cut rates, and fast. While a more likely response will be a large scale renegotiation of Eastern European debts, it is clear the region's s problems will soon force Western Europe's leaders to act.

The way the ascent of this seemingly untouchable investment region has hit the skids should serve as a warning to investors globally. While the region's indebtedness dwarfs that of other emerging markets at an estimated 50% of GDP, it is still a clear example of the risks associated with investing in the new economic miracles of the world. With this in mind it is clear that any investment capital deployed to Eastern Europe or any emerging market should be done with a small percentage of your portfolio, and only by those investors with a relatively high appetite for risk and long-term investment horizon.

It would be nice to toe-dip into a holding like the SPDR S&P Emerging Europe ETF, (NYSE: GUR), but investors should continue to watch and wait.