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Portugal's recent bailout issues are front-page news. Curiously, ETF-focused publications have been largely silent. My own website, IndexUniverse.com, hasn't even covered this news yet.

The reason is simple: There is no ETF pure play for Portugal. The closest you can get is the iShares MSCI EMU ETF ( EZU), a broad-based eurozone fund, and it has just 0.84% exposure to Portugal.

But for a savvy ETF investor, what's happening in Portugal is very important.

Thursday evening, S&P downgraded Portuguese sovereign debt to BBB (two ratings away from "junk") according to The Wall Street Journal. Fitch followed suite with a downgrade on Portuguese debt to A-.

The fallout in the bond space has been immediate. Yields on Portuguese 10-year bonds pushed past 7.8%, while five-year bond yields jumped to 8.3%. These are massive numbers for sovereign debt. Investors are looking past Portugal's insistence that no bailout is necessary and focusing on the fact that $13 billion worth of bond redemptions are due in April and June; a default or bailout is a non-zero possibility. (We've also seen fallout in the euro, which dropped 30 basis points this morning.)

Fortunately, we have a roadmap for how this plays out. Fears of European contagion and the measures necessary to bailout Greece and other troubled European Union members sent the euro in a downward spiral last year.

The euro's downfall left visible marks on funds that offered exposure to failing member states, including the EU's strongest member state, Germany. iShares' single-country funds like the iShares MSCI Italy Index Fund ( EWI) and the iShares MSCI Germany Index Fund ( EWG) took 18.9% and 10.5% hits, respectively, by June 6, 2010.

Single-Country Funds - Monthly

Some were quick to attribute these bumps to investors' fears of a complete fiscal meltdown in Europe, however, many missed the point. The euro plays a key role in these funds; every 1% drop in the euro relative to the U.S. dollar translates into a 1% decline in euro-denominated funds. Even ignoring the impact on the equity markets themselves, the fallout on the euro is cause for concern.

In the international fixed income space, the SPDR International Govt-Protected Bond ETF ( WIP) and the SPDR Short Term International Treasury Bond ETF ( BWZ) also dropped 8.09% and 4.28%, respectively, by June 6, 2010, during the last "troubles."

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