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Reuters recognized the most serious risk to Latvia as being October's elections, which will most likely lead to another multi-party coalition government, informs LETA.

As polls are showing the highest support for Harmony Center and Prime Minister Valdis Dombrovskis' Unity alliance, the question arises as to whether these two forces could agree to work together in a new government, writes Reuters.

There is also a question over a possible softening of Latvia's adherence to the IMF program by a new government, which could cause doubts on financial markets about the sustainability of the economy and renew the risk of a devaluation of the lat.

Estonia's main challenges are linked to the introduction of the euro, which will increase support for the ruling parties ahead of the elections set for March 2011.

Nevertheless, some instability inside the ruling coalition is expected as the country nears the March elections, with the junior coalition partner, Pro Patria and Respublica Union, trying to emerge from the leading Reform Party's shadow, according to Reuters.

The main challenge for the election victors will be staying within euro zone limits and staying on the path of fiscal austerity.

The threat of instability is also present for Lithuania, as Prime Minister Andrius Kubilius' minority government is dependent on a small group of independent deputies, with the possibility that another party could also leave the government.

A major test for the government will come in December, when parliament has to vote on a budget for 2011. Before that, the Seimas will have to approve yet another set of fiscal consolidation measures.

If the government's weak position leads to fiscal slippage and problems financing its budget deficit, then speculation against the currency could mount and local market interest rates rise. This could also spread worries to the other two Baltic States, according to Reuters.