Latvia?s frail economic situation has remained at the centre of the global financial debate, even as markets have strengthened over the last couple of months. The subject is of great importance to Russia and Europe investors as the break down of one Baltic state would quickly transmit to the other two, and probably into wider Emerging Europe. Western Europe?s banking system is hugely exposed, so that although the EU is attempting to distance itself from these issues, it is directly involved and remains focussed on preventing a wider meltdown.

Notably, the renowned economist Nouriel Roubini wrote in the FT to predict an Argentinean style crash in Latvia. Roubini is an exceptional professional, with excellent experience of emerging markets. But, in this case it is hard to fully support his belief.

It is far from clear that Latvia will devalue, and it is plain wrong to suggest that it is following Argentina?s course. Here is why.

Chart 1: Latvia Current Account

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1. Argentina was economically mismanaged both in the run up to its crisis and ever more throughout it. Latvia, by contrast is being managed competently, with the explicit support of the EU and IMF. Certainly, it should have devalued a year or two earlier, but at that time it was following policy aimed at euro accession (and only missed on unrealistic inflation conditions).

Most important, the Latvian government has cut costs substantially, approving severe spending cuts to keep the budget deficit under control. The discipline is there to pursue internal devaluation and maintain the peg.

2. Euro reserves continue to cover lats completely. It is unclear why the Latvian central bank has not switched to a currency board, as run by its neighbours (although it is perhaps too late for such a change now anyway). But, the FX market remains illiquid and so the depletion of reserves is far from an immediate issue for currency confidence. During the Argentinean crisis, the economy rapidly dollarised, as the central bank failed to maintain FX reserve-peso coverage ratios.

3. There was no logic for Argentina to hold its currency peg. By contrast, Latvia is pursuing the peg for a clear economic objective, which its population understands and broadly supports ? maintaining the peg is a necessary step for Latvia to keep its euro adoption schedule. Thus, for Latvia, there is light in the tunnel (albeit two years distant), which there was not for Argentina.

4. The economic adjustment necessary to sustain the peg is well underway. Salaries have been slashed, the government has approved a bold austerity package, and the current account deficit is now positive once more. Just as pressure lifted on the ruble as the oil price bottomed, so too should pressure lift on the lat now that its economy is back in balance. Painful as the rebalancing has been, the heavy lifting has been completed and the market ought to begin to price this in the coming months.

Clearly, there are arguments for Latvia devaluing, and doing so would arguably have been a less painful adjustment procedure ? especially if the banks participated and shifted loans into lats rather than keep them in euros.

Much depends on the Latvian government?s ability to finance itself ? can it raise money while holding the currency at this level? (A recent auction failed in the midst of the battle to approve austerity measures.) It is also rather worrying that the IMF now seems to be less vehemently supportive of the lat than it previously was (although has begun to release finances held back.

Most important, the market is still gunning for devaluation. Anyone expecting a further bout of market turbulence should be prepared for another round of speculation against Eastern European currencies. But, the Latvian case is now tightly balanced. Devaluation momentum is pitched against the fundamentals, and the logic for devaluation has all but gone. If the market can recognise this, then the Baltic pegs have every chance of holding.