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"Latvia stands out as the weakest of the three because its external debt is very high and it's got a big current-account deficit," said Win Thin, New York-based senior currency strategist at the oldest privately-owned U.S. bank. "The contagion between the three is so strong that if Latvia broke the others wouldn't be able to resist."

Brown Brothers Harriman & Co. (BBH) is a large USA private bank which was formed in 1931. Brown Brothers Harriman provides financial services to a variety of mutual funds, hedge funds, asset managers, financial institutions, and insurance companies, reports BLOOMBERG/LETA.

Latvia, Estonia and Lithuania are "under pressure" to follow Russia and Kazakhstan in reducing their currency management and allowing devaluation, Nouriel Roubini, the New York University professor who forecast the U.S. recession, said last week.

Latvia's economy shrank 10.5% in the fourth quarter of 2008, the steepest drop in the European Union and the country's biggest since quarterly annual records began in 1995, according to preliminary data. The nation has to fund a 92.5 million lati (168 million dollars) current-account deficit while credit markets around the world remain frozen.

Lithuania is heading into a two-year recession with gross domestic product forecast to decline 4.9% this year, the nation's central bank said last week. Estonia's economy contracted an annual 3.5% in the third quarter, the weakest in the 27-member European Union after Latvia, and may shrink 8.9% this year, according to its central bank.

Dwindling reserves may force the Baltic currencies devaluation, according to Thin. Latvia's reserves have dropped 27% to 4.7 billion dollars since July, according to data from its central bank as of Jan. 31. Estonia's declined 5% to 3.9 billion dollars in the second half of last year, and Lithuania's slumped 13% to 6.3 billion dollars, International Monetary Fund data show.

"They're going to run out of reserves and funds at some point and they'll look to contain the reserves bleed," Thin said in an interview.

Latvia is the most indebted among east European nation's with external debt equivalent to 130% gross domestic product. Estonia is 108% and Lithuania is 70%, according to Brown Brothers data. Russian debt by comparison is just is just 34% of GDP.

"You can't rely on external funding in a global environment like this," Thin said. "The longer this crisis drags on the higher the likelihood that their pegs will collapse."

Latvia buys and sells foreign-currency reserves to prevent the lats from fluctuating more than 1% either side of 0.702804 per euro. It was little changed at 0.7064 per euro by 2:55 p.m. in Riga.

Latvia's currency gained 0.2% against the euro this year, while Russia's ruble slumped 15% against the dollar, and the Kazakh tenge was devalued 21% last week. Belarus' ruble management weakened 21%. A 50% decline would leave the lats at about 1.4 per euro based on yesterday's closing price.

The Estonian kroon is kept around 15.6466 per euro, while the litas stays at about 3.4528 per euro. This type of management regime is often called a currency board.

The IMF is allowing Latvia to keep its peg while receiving 7.5 billion euros ($9.6 billion) in assistance. The Washington- based fund demanded Ukraine move toward a more flexible exchange- rate regime for the hryvnia when it offered the nation 16.4 billion dollars.

"The IMF has taken a hit to their reputation" by allowing Latvia to retain its fixed currency regime, Thin said.