Argentina’s Debt Service Prospects Remain Unclear After Latest Policy Moves

PRESS RELEASE from Fitch Ratings
23 July 2024

(This is an abridged version. Click here for the full release)

Fitch Ratings-New York/London-23 July 2024: Argentina’s latest economic adjustment measures compound uncertainties over its ability to accumulate international reserves and recover access to global capital markets, Fitch Ratings says. These uncertainties are reflected in our ‘CC’ sovereign rating, affirmed in June, which signals our view that a restructuring or default event of some sort on foreign-currency (FC) bonds is probable.

President Javier Milei secured an important victory last month with passage of his flagship “Ley Bases” bill. The boost to confidence was short-lived, however, as market attention has turned to tensions in the policy mix that we noted in our sovereign rating review.

The 2% monthly crawl of the peso has widely lagged inflation, erasing the benefit from last December’s devaluation. FX controls and negative real interest rates remain in place, without clear prospects for their phase-out. International reserve accumulation has halted. Parallel exchange rates have since risen to over 50% above the official rate, and bond spreads to nearly 1,600bp.

In response, the authorities this month unveiled new measures. They had already ended central bank (BCRA) financing to the treasury and repaid some past financing. Interest rates have been kept very low to shrink the BCRA’s sterilization instruments and their interest payments (a key source of peso creation). Now, the authorities will replace remaining sterilization instruments with LEFI notes issued by the treasury. And last week, the BCRA bought back its put options on local bonds, which require peso creation if exercised.

The authorities will also begin intervening in parallel exchange markets by selling dollars purchased in the official market, to close off another channel of peso creation and lower parallel exchange rates.

The authorities aim to strictly limit peso supply, letting it grow only as a function of higher money demand from credit intermediation. They expect this will anchor further a reduction in inflation and improve conditions to remove FX controls without major exchange-rate and financial market disruption.

However, it is unclear how much difference this plan will make. In assuming the debt of the BCRA, the treasury will build up a new stock of short-term debt that could be a source of potential dollar demand in a confidence shock. The BCRA also maintains the right to buy the LEFIs, leaving a route open for peso creation.

The consolidated peso securities of the BCRA and treasury have continued growing in real terms this year, despite the reported fiscal surplus and BCRA’s lower quasi-fiscal deficit. This is because the interest on many treasury securities is capitalizing on principal, and not registered in fiscal data. The shift from negative to positive real interest rates, which would be needed for FX controls to be lifted, could further increase this debt stock. To shrink it, an even larger fiscal surplus might be needed, which could stifle an economic recovery.
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(This is an abridged version. Click here for the full release)