Argentina sovereign ratings raised to 'CCC-/C' from 'SD' after cured default

PRESS RELEASE from S&P

30 August 2019

(Please note that this is an abridged version. Read the full release)

•      On Aug. 28, following the continued inability to place short-term paper with private-sector market participants, the Argentine government unilaterally extended the maturity of all short-term paper. This constituted a default under our criteria, and yesterday we lowered our foreign and local currency sovereign credit ratings to 'SD'.

•      The amended terms and conditions for the short-term debt became effective immediately, which cured the default. We are now raising our long-term sovereign credit ratings on Argentina to 'CCC-' and our short-term sovereign credit ratings to 'C'.

•      As the Macri Administration is sending legislation to Congress seeking support from the Argentine political class to engage in a re-profiling of its long-term commercial debt, in local and foreign currency, there is heightened risk of a default under our criteria, consistent with a 'CCC-' rating.

•      The negative outlook reflects the prospects that the Macri Administration might gain political backing and engineer a re-profiling this year, or that ongoing market turbulence amid political uncertainty or inaction could compromise timely debt service capacity under the current or next administration.

Rating Action

On Aug. 30, 2019, S&P Global Ratings raised its foreign and local currency sovereign credit ratings on Argentina to 'CCC-/C' from 'SD'. The outlook on the long-term ratings is negative. In addition, we raised our short-term issue ratings to 'C' from 'D'. We also raised the national scale rating to 'raCCC-' from 'SD'.

Outlook

The negative outlook reflects the prominent downside risks to payment of debt on time and in full per our criteria over the coming months amid very complex political, economic, and financial market dynamics. The Macri Administration may advance a restructuring during its current term in office if it garners support from the Argentine Congress. Alternatively, the outlook reflects risks associated with failure to advance such a restructuring proposal and the prospects for ongoing stressed market dynamics before and after the Oct. 27 national elections, and with it, risk of a missed payment on Argentina's debt obligations.

We could lower the long-term ratings to 'CC' over the coming months if the government advances negotiation with bondholders for a potential debt exchange that could be characterized as a distressed exchange based on our methodology as we see the most likely scenario would be an extension of maturities, which will not be compensated by the issuer.

Alternatively, absent backing for a re-profiling, we could lower the rating should additional economic and financial stresses threaten timely debt service under the current or next administration.

Liquidity is extremely tight, and prospects for the fifth disbursement under the IMF Stand-By Arrangement as well as the direction of economic policies post the national elections both remain uncertain.

We could revise the outlook to stable over the coming months if policy signals and execution start to successfully turn around or stabilize private-sector confidence, market turbulence subsides, and the government regains market access for government financing.

Rationale

The 'CCC-/C' ratings on Argentina reflect pronounced credit vulnerabilities and heightened risk of non-payment. The government has defaulted for the third time since 2001, under our methodology. The absence of confidence in the financial markets about policy initiatives under the next administration--complicated by the fact elections are several months away and a new administration assumes office only in December-–has severely compromised the ability of the Treasury to roll over commercial debt and the central bank to manage volatility in the peso.

Against the backdrop of declining international reserves, an inability to place paper in the market prompted Argentina's recent and possible forthcoming debt re-profiling. The immensely stressed debt dynamics amid a depreciating exchange rate, a likely acceleration in inflation, and a deepening economic recession all weigh on Argentina's credit profile. Marked liquidity pressures have materialized, which, coupled with the risk of not receiving the fifth disbursement from the IMF, weigh on our external and liquidity assessments. Severe challenges confront the ability of both the current administration and the leading presidential candidate to contain market volatility and restore financial and economic stability.

Please see our recent research update on Argentina, titled "Argentina Long-Term Sovereign Ratings Lowered To 'B-' As Market Turbulence Weakens Creditworthiness; Outlook Negative," published Aug. 16, 2019.