With what will I defend it with, dear Liza?

A cursory glance at the success rate of emerging countries attempting to defend their currency pegs in the last half century does not reveal a positive outcome here.

By Aaron Eglitis

     June 4 (Bloomberg) -- Latvia’s central bank pledged to

defend its currency’s peg to the euro as some investors shunned

assets linked to the Baltic nation on concern its economic

collapse will precipitate a devaluation.

     The bank “has explained and clearly said that it will

maintain the stability of the lats until the lats is replaced by

the euro,” it said in a statement on its Web site today. “It’s

clear that such a mechanism as a fixed currency exchange rate

allows the Bank of Latvia to achieve this policy.”

     The Baltic country, which is suffering the severest

recession in the European Union, is struggling to rein in its

budget gap in order to secure the continued payment of an

international bailout. Latvia’s economic collapse is threatening

the prospect of recovery in Sweden, known for its textbook

handling of its 1990s banking crisis, because the largest Nordic

nation’s banks are the biggest in the Baltic region.

     The situation in Latvia is “markedly worrisome,” Swedish

Finance Minister Anders Borg said in a statement on the

government’s Web site today. The economy shrank an annual 18

percent in the first quarter.

     Credit-default swaps linked to Baltic government debt rose

for a second day today. Contracts on Latvia soared 60 basis

points to 735, the highest since April 28, according to CMA

DataVision prices at 12:20 p.m. in London. Default swaps linked

to Lithuania climbed 35 basis points to 485 and Estonia rose

12.5 to 365.