S&P downgrades Argentina’s rating in local currency

S&P downgrades Argentina’s rating in local currency

Despite Argentine President Javier Milei’s stringent measures to curb inflation, his country took another slump Wednesday after the international credit rating agency Standard & Poor’s (S&P) declared it in “Selective Default” following a domestic debt swap worth some U$S 55.3 billion in pesos with local creditors.

”We downgrade our local currency ratings on Argentina to SD (selective default) [from CCC-] following the announcement of a peso-denominated debt swap that we consider distressed and not opportunistic. We view the swap as problematic due to the government’s poor access to the market and our expectation that, in the absence of participation, a conventional default is likely,“ S&P said in a statement that also underlined the scarce presence of creditors outside the public sector in the operation. Of the 77% of adhesion to the US$ 42.6 trillion in securities maturing in 2024, the private sector only contributed 17.5%.

”Once the local currency debt swap and the issuance of new securities are completed, we would consider that the local currency default is ‘cured’ and we would probably increase our long-term local currency rating to the ‘CCC’ category,“ S&P also said.

A ”Selective Default“ or ”SD“ grading is given when an issuer is ”deemed to be in default of one or more of its financial obligations, whether long or short term, including both rated and unrated, but excluding hybrid instruments classified as regulatory capital or in default according to the terms“ and also when ”it is deemed to be a default in connection with a specific issue or class of obligations but that the issuer will continue to honor other issues or classes of obligations within the stated terms.“ While previous administrations have used such debt swaps, the record size of this week’s deal tested local market confidence in Milei as he seeks to reform the economy, reduce runaway inflation, and accumulate foreign reserves.

S&P kept Argentina’s rating unaltered regarding its debt in US currency but warned that the outlook was negative in the long term due to ”political uncertainties and the risks posed by large and persistent economic imbalances.“

”Disagreements between the newly elected administration of President Javier Milei, Congress, and provincial governors have so far limited the government’s ability to implement its ambitious economic reform agenda to stabilize the economy. Global capital markets remain closed to Argentina, leading the government to rely on the local market, using swaps to manage large maturities as well as traditional debt auctions,“ S&P also argued.

Downgrading Argentina’s foreign currency status will hinge on whether ”adverse political developments delay economic policy and further weaken the sovereign’s already limited access to financing,“ S&P also explained. ”Loss of access to multilateral financing, especially under the IMF’s Extended Fund Facility, would severely limit the sovereign’s ability to meet its modest foreign currency commercial debt service,“ the statement went on.

The country’s recovery now depends on ”a successful execution of economic policies that continue to address Argentina’s main structural macroeconomic imbalances, laying the groundwork for improved fiscal performance, containment of high inflation and a sustainable economic recovery,“ S&P insisted. ”In such a scenario, the government would enjoy improved access to voluntary market financing.”