Emerging Markets-Selloff on Georgia conflict, Argentina fears

By Daniel Bases

NEW YORK, Aug 8 (Reuters) - Fighting between Russia and Georgia involving a breakaway republic and plunging confidence in Argentina's future ability to fund its financial obligations cast a pall over emerging market assets on Friday.

Stocks in the sector fell to fresh one-year lows, largely on the back of sinking Russian equities which bore the brunt of investor unease about clashing Russian and Georgian forces.

Morgan Stanley Capital International's emerging markets stock index .MSCIEF fell 1.82 percent to 989.81, its lowest since August 2007.

An overnight assault by Georgian troops and artillery into separatist South Ossetia sparked more fighting, with Moscow sending in troops in response to retake the region which it has supported against the pro-Western government in Tbilisi.

Russia's benchmark RTS stock index fell 6.5 percent on Friday , nearing a 14-month low set on Wednesday, while the rouble fell versus a basket of currencies split 0.55 for dollars and 0.45 for euros.

External factors such as a surging U.S. dollar contributed to weakness in most emerging market currencies.

For Georgia's 2013 Eurobond, sold in April, the military conflict caused a 5-point drop in price to bid 90.50, yielding 10.095 percent, according to Reuters data XS0357503043=R.

"People are getting concerned the strong-arm tactics used in Russia historically may be coming back. They have tons of money from eight years of high oil prices to replenish their army. ... It could remain a source of risk aversion for emerging markets overall," said Paul Biszko, senior emerging markets analyst at RBC Capital Markets in Toronto.

Both Standard & Poor's and Fitch Ratings cut their credit ratings by one notch on Georgia, citing the conflict and the potential to limit foreign investment which plays a crucial role in funding development in the former Soviet republic.

(For related stories please click on [ID:nN08170632], [ID:nN08468988], or [ID:nL8572913].)

ARGENTINE SELL-OFF

At the same time investors piled into financial insurance to protect their investments in Argentine debt on rising concerns that its window for financing future spending needs is deteriorating with falling commodity prices.

Moody's Investors Service told Reuters late on Thursday it was going to review the credit rating outlook for Argentina in coming weeks given concerns over the funding issue as well as a tense political environment after a bitter fight over a now-defeated agriculture tax plan.

"Moody's said they may downgrade the outlook and I think that triggered new fears among investors," said Biszko.

A widely held belief that Argentina is underreporting inflation and relying too heavily on the goodwill of Venezuela to buy its debt has caused a flare-up in risk aversion despite the nation's sizable foreign currency reserves of $48 billion.