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Global thematic manager Sarasin & Partners has a zero weighting in emerging European banks and bonds after a Latvian government bond auction failed last week, the company has revealed.

Guy Monson, managing partner, said Latvia was now unable to issue more debt and that risks of financial contagion elsewhere in the region remained.

"Eastern Europe stands out by far as the biggest risk in the region, but the European Central Bank seems to be twiddling its thumbs," he said. "The part that is missing is policy determination to use fiscal transfers across Europe."

He contrasted the situation unfavourably with that of Portugal and Ireland, whose financial weaknesses have prompted particular concern from investors. Fellow PIIGS nations Italy, Greece and Spain have been subject to similar uncertainty.

Mr Monson pointed out the spread of 10-year Irish government bonds over 10-year German bonds had already lowered from 283 basis points to 201bps since the middle of March. The spread of Portuguese over German national debt had come down from 175bps to 94bps.

The shift has decreased the Irish and Portuguese governments' cost of funding and reflected improved market sentiment about their debt.

"You had a blowout in peripheral European bond spreads, but stability within the eurozone has improved somewhat," Mr Monson said.

The gravest concerns now surrounded eastern European countries outside the eurozone, according to the managing partner. The failed Latvian auction has stoked fears about how the country will refinance itself in the middle of a sharp recession. Elsewhere in the region, the IMF has already bailed out governments in Hungary and Ukraine.

According to Mr Monson, financial contagion in emerging Europe could spread, in particular to Romania, Bulgaria, Hungary and the Balkans. The firm has, therefore, kept its portfolios void of emerging European banks and bonds and is watching other institutions with emerging EU exposure closely.

"There is a very high concentration of debts in Swedish and Scandinavian banks," he said. "There also seems to be some borrowings from Greek banks, plus a little French banking exposure. There are also some Turkish banks in there."

Taking the example of Latvia, Mr Monson said the country could seek EU or IMF funding or simply devalue its currency in the manner of Argentina earlier this decade.

He said devaluation was a particularly attractive option, as in the past it had enabled countries to emerge from high unemployment rates sooner, in spite of causing a short-term spike.

"It's awful for the banks and debtors, but for the economy, it's the only way out. Historically, when things have got this bad, the best thing is to let them collapse."

Some commentators have compared the situation with the Asian crisis of 1997. As in certain Asian nations during that period, a high proportion of emerging European private loans are denominated in foreign currencies that are strengthening against domestic equivalents.

But while the crises had similarities, Mr Monson said, they were not of the same magnitude.