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The Deficit Strikes Back

Bloomberg is carrying a report today about S&P considering another cut in Russia’s credit rating, down from its current BBB.  This downgrading, which may come about as a result of the return of 1990s-style budget deficits, could sting quite a bit:  BBB is the bottom credit ranking for investment grade, while a drop to BB would put Russia on the junk bonds list.  What does this mean?  Among other things, pressure for devaluation of the ruble is growing quickly.

Russia risks returning to a period of entrenched budget deficits that may threaten its credit rating and weaken the ruble as it struggles to emerge from its first recession in a decade.

The country faces “still-substantial risks to public finances due to the severe economic contraction” and financial risks linked to “stress” in the financial industry and liabilities of state-run companies, Standard & Poor’s analysts including Frank Gill in London wrote in a report yesterday. (…)

State spending is paced to escalate late in the year with about one third of the total to be disbursed in the fourth quarter, Anton Stroutchenevski, a Moscow based economist at Troika, said in a phone interview yesterday. That may raise the money supply by between 10 percent and 15 percent, leading the ruble to fall by the same amount, he said.

“The government’s budget policy ensures a very high exchange-rate volatility,” he said.