Debt perception and the Russian markets

With the S&P warning about the U.S. credit outlook triggering concerns about global debt levels Business RT spoke with Roland Nash, Senior Partner and Chief Investment Strategist at Verno Capital about the implications for Russia.

RT:  The Dow Jones declined just 1 percent following the S&P’s warning. Meanwhile the Russian markets lost around 4 percent, despite the fact that there are no worries about the country’s public debt. Why is that?

RN:  “In some ways it really doesn’t make that much sense. Russia, in that sense, in the debt sense, is safe compared to a lot of other places.But a lot of money that has been coming into the Russian markets over the past three or four months has been quite short term, and whenever there is an increase in risk, people tend to sell risk assets.And the world still views Russian equity and Russian markets as risky.So they sold down.”

RT:  The European markets are on the rise, the yields for U.S. treasury bonds are still down from Friday’s levels. It seems that the markets are not taking S&P warning too seriously?

RN:  “I am not so sure about that.They are having a rebound.Yesterday was a pretty terrible day on the markets, and this just may be the dead cat, proverbially bouncing at the moment.But I think the S&P is not actually the key.They key is what is going on in Europe at the moment.The potential restructuring of the debt there that I think is something that the markets really are concerned about.S&P are just really reflecting what a lot of people already know, which is that the US has some serious debt issues right now.”

RT:  What are the risks for Russia in the current situation?

RN:  “I think that the risks for Russia at the moment on the international side are what is actually going on in Europe.What is going to happen with that debt – whether it is going to be restructured in Greece.And the big key right now is Spain.This is a very large economy and the markets are worried that what’s happening in Portugal and Greece is going to impact Spain as well.And if that happens, then once again there will be a big increase in risk perception and Russia will sell down. “

RT:  What sort of impact are the worries over the US and European debt having on emerging economies?

RN:  “I think emerging economies are, from a fundamental basis, looking stronger in relation to what’s happening in Europe and the US.We can see that emerging economies don’t actually face the same problems as Europe and the US.But they are considered to be risky, when there is an increase in risk perception those markets will tend to sell off unfortunately.”