Fitch, S&P downgrade Argentina’s debt rating as default risk grows

Ratings agencies Fitch and Standard & Poor’s (S&P) downgraded Argentina’s sovereign debt rating, flagging higher chances of a default in the wake of a shock primary election result that plunged the country into its latest economic crisis.

The downgrades cap a tough week in which the peso lost nearly 20% of its value, forcing the central bank to eat into its reserves with dollar auctions. Fitch downgraded Argentina’s sovereign debt rating from ‘B’ to ‘CCC,’ while S&P lowered its rating to ‘B-’ from ‘B.’

Argentine markets were in free-fall for most of the week after Sunday’s vote when center-left presidential candidate Alberto Fernandez trounced center-right President Mauricio Macri. The scale of Fernandez’s victory suggested he could win the October ballot in the first round, potentially putting an end to free-market economic reforms and an IMF-backed austerity plan.

“The downgrade of Argentina’s ratings reflects elevated policy uncertainty following the primary elections, a severe tightening of financing conditions, and an expected deterioration in the macroeconomic environment that increase the likelihood of a sovereign default or restructuring of some kind,” Fitch said.

Fitch said it expected Argentina’s economy to contract 2.5% in 2019, down from a previous forecast of 1.7%. Fitch added that it saw government debt rising to around 95% of gross domestic product in 2019.

S&P saw 2019 growth falling 2.3%, compared with a prior forecast of a 1.6% decline.

Alejo Czerwonko, emerging markets strategist at UBS Global Wealth Management’s Chief Investment Office, said the downgrade was not going to substantially change many people’s minds about the solidity of Argentine debt.

“Argentina was already rated deep into junk territory and this is pushing the rating a bit deeper, but it reveals little new information to investors,” he said.

While Fitch said it expects growth to be flat in 2020, S&P saw 2020 growth at 0.5%, compared with a prior forecast of 2.2%, highlighting uncertainty over the policies of Fernandez.

Fitch said the chances of Fernandez winning the election had grown, raising doubts about the future of Macri’s IMF-backed austerity plan. The fact that Fernandez’s running mate is leftist former President Cristina Fernandez de Kirchner, a longtime skeptic of the IMF programme, only heightened those doubts, Fitch said.

“We could lower the ratings over the next 12-18 months if economic and financial stresses continue to mount,” S&P said, adding it saw “a greater than one-in-three chance of a downgrade over the coming year.”

Argentina’s central bank must toe a politically fraught line between supporting the peso without blasting through the bank’s reserves, as policymakers seek to salvage the currency ahead of October’s presidential election, analysts said on Friday. The peso was in free-fall for most of this week after a shock primary election result on Sunday, when center-left presidential candidate Alberto Fernandez trounced center-right President Mauricio Macri.

The scale of Fernandez’s victory suggested he could win the upcoming ballot in the first round, but potentially be left as leader of a country that has very few foreign reserves left, raising the chances of a debt default.

On Friday afternoon, in a fresh headache for Argentine policymakers, Fitch downgraded Argentina’s sovereign debt rating from “B” to “CCC,” flagging an increased likelihood of a default.

“One strategic element for the government and the opposition is how the current reserves of the central bank are used,” consultancy Fundacion Mediterranea said in a note. “The opposition does not want the current administration to leave the central bank with very few reserves, and it is convenient for the government that the proposals announced by the opposition are reasonable for the markets.”

The peso’s collapse, which comes amid growing fears of a global recession, forced the central bank to sell dollars and oblige private banks to trim their dollar holdings in order to provide liquidity to the market.

The new dollar holdings rule unleashed about $400 million, traders said, and helped stabilize the peso on Thursday and Friday.

Since Sunday’s vote, the central bank has auctioned a total of $503 million.

The central bank, which is nominally independent but has long been prone to executive interference, has about $66 billion in reserves, of which about $20 billion are free resources that can used to pay debt and stabilize the peso, according to an Argentine government official.

In its statement, Fitch said the central bank’s interventions had so far been modest, allowing for more aggressive action down the road if needed.

“Nevertheless, the recent currency run and risks of further pressure and volatility are detrimental for sovereign debt sustainability, which had previously been predicated on expectations of a real peso appreciation,” Fitch warned, while also highlighting risks to growth and inflation.

Reuters