Standard & Poors announced on Thursday that it was slashing Argentina‘s long-term credit rating by another three notches into the deepest area of junk debt, saying the government’s plan to “unilaterally” extend maturities had triggered a brief default.
The rating agency said it would consider Argentina’s long-term foreign and local currency debt issue ratings as CCC – “vulnerable to nonpayment” – starting on Friday following the government’s Wednesday announcement that it wants to “re-profile” some $100bn in debt.
The plan, which requires congressional approval, has stoked fears of a full-blown financial crisis in Latin America’s third-largest economy, two months before business-friendly President Mauricio Macri‘s handling of the economy is tested in a general election against a leftist rival.
Argentina’s bonds sank on Thursday and country risk soared to levels unseen since 2015.
The latest round of volatility to buffet the recession – and the inflation-racked country – began when Macri suffered a harsh defeat in an August 11 primary election at the hands of populist-leaning Alberto Fernandez.
“We see the most likely scenario as an extension of maturities, which will not be compensated by the issuer,” S&P said. “Alternatively, there are risks associated with failure to advance, and prospects for ongoing stressed market dynamics post-the national elections.”
The agency added that Argentina’s long-term sovereign credit rating would sink to SD, or selective default, overnight, and the short-term rating was cut to D, before the “upgrades” to CCC minus and C respectively take effect on Friday.
Effectively, investors holding long-term Argentine debt will wake up holding CCC-minus-rated debt that on Thursday was rated B minus. Some of them may be forced to sell due to the downgrade.
“The extension of the maturities of the short-term debt with no compensation constitutes a default,” it said. “As the new terms became effective immediately, the default has also been cured.”
Investors in Argentina fear a return of the left to power could herald a new era of heavy government intervention in Latin America’s third-largest economy.
By the time Treasury Minister Hernan Lacunza said on Wednesday that the government wanted to extend maturities of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp had already been widely expected.
Argentine spreads over safe-haven US Treasury bonds, a measure of the perceived risk of default, nonetheless shot 204 basis points higher to 2,276 on Thursday, according to JP Morgan’s Emerging Markets Bond Index Plus.
Developing markets investment house Tellimer calculates that $7bn of short-term debt, $50bn in long-term debt and $44bn of the IMF debt may be earmarked for an overhaul.
Lacunza labelled the debt-extension operation a “re-profiling” of obligations that will affect institutional rather than individual investors.
The bond market gave the plan a collective thumbs down.
Argentina’s century bond traded at a record low of 40.222 cents on the dollar before inching up a couple of cents according to MarketAxess data. The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.
Closer on the maturity curve, the April 2021 issue dropped under 50 cents for the first time, while the January 2022 issue also hit a record-low price.
Lacunza said he would send a bill to Congress to approve changes to bonds governed by local law. Talks with holders were expected to start soon, but would likely be concluded by the government that wins the October general election and takes office in December.
Fernandez, whose running mate is former President Cristina Fernandez de Kirchner, is now the clear frontrunner. Populist icon Kirchner is loved by millions of Argentines who remember generous welfare spending during her 2007-2015 administration.
“We remain cautious,” Citi said in a note. “While we think the short-term funding needs have been addressed, political uncertainty remains high: any proposal on global bonds could be unwound by the potential new administration.”
Restructurings are a traumatic subject for voters who remember the country’s 2001 default, part of an economic meltdown that tossed millions of middle-class Argentines into poverty. Subsequent mini-defaults kept the country locked out of global capital markets for years.
Macri prided himself on getting the country out of default early in his administration and promised to reintegrate Argentina with the global markets. But he overestimated his ability to attract the foreign direct investment needed to provide Argentina with sustained economic growth.
The central bank spent $367m of its reserves in foreign exchange market interventions on Wednesday and $223m on Thursday in its effort to defend the local peso.
The peso reacted positively, recovering from steep early-day losses to close 0.35 percent higher at 57.9 per US dollar. But the currency is down 21.7 percent since Macri’s primary vote debacle all but erased his chances of being re-elected in October.
Among key players going forward will be the IMF, which has a $57bn standby loan deal with Argentina. Fernandez has said he wants to renegotiate the IMF pact, which has imposed unpopular austerity measures that damaged Macri’s popularity and set him up for the drubbing he took in the primary vote.
Macri-allied legislator Eduardo Amadeo told Reuters that Congress will decide on whether to support the plan by how long the government will seek to extend maturities. “It’s something that has not been decided yet,” he said.
The Macri administration would need support from Fernandez and opposition legislators to get the reprofiling through the legislature.