Moody's downgrades Argentina's ratings

New York, August 30, 2019 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Argentina's foreign-currency and local-currency long-term issuer and senior unsecured ratings to Caa2 from B2. The senior unsecured ratings for shelf registrations were also downgraded to (P)Caa2 from (P)B2. The outlook on these ratings has been changed to ratings under review from negative.

 

Moody's decision to downgrade Argentina's ratings reflects the rising expectation of losses for investors as a consequence of mounting pressures on the government's finances, most recently reflected in the government's August 28 decision to delay repayment on over $8 billion of short-term debt and to signal its intent also to restructure portions of Argentina's medium and long term debt.

 

The decision to downgrade to Caa2 ratings reflects Moody's current assessment of losses expected should any restructuring involve a relatively limited reprofiling of debt maturities. The decision to place the Caa2 ratings under review for further downgrade reflects the strong downward risk bias, given the uncertainties associated with such restructurings.

 

At the same time Argentina's short-term rating was affirmed at Not Prime (NP). The senior unsecured ratings for unrestructured debt were affirmed at Ca and the unrestructured senior unsecured shelf affirmed at (P)Ca. Those ratings are not affected by the review for downgrade, the NP short-term rating already being at the lowest point in the rating agency's short-term rating scale and Ca on the government's bonds that were never restructured appropriately capturing expected losses for the holders of those bonds.

 

Argentina's long-term foreign-currency bond ceiling was changed to Caa1 from B1 and the foreign-currency deposit ceiling changed to Caa2 from B3. The local-currency country ceilings for bonds and bank deposits

were changed to B2 from Ba2. The short-term foreign-currency bank deposit ceiling and the short-term foreign currency bond ceiling remain unchanged at Not Prime (NP).

 

RATINGS RATIONALE

 

On 12 July, Moody's changed the outlook to negative on Argentina's long-term issuer and senior unsecured ratings to reflect rising uncertainty regarding policy intentions and the consequences for investor confidence. Since then, two key events have occurred.

 

First, the outcome of the national primary elections (the 'PASO') in August implied a high probability of a victory in the October presidential election for the opposition candidate, Alberto Fernandez, and his running mate, Cristina Fernandez de Kirchner. That outcome led to a severe market reaction which in turn raised the government's debt load, lowered debt affordability, and reduced funding sources.

 

Second and as a consequence, the government has now announced delays in the repayment of more than $8 billion of short-term debt, and the intention to seek a 'voluntary reprofiling' of longer-term debt, including debt owed to the IMF. The exact consequences of the government's pronouncements are unclear, and some will in

any event be for the subsequent administration to determine.

 

Today's action reflects the rising expectation of losses to investors as a consequence of these events. It is already clear that holders of short-term debt will incur some losses as a result of delays in repayments, and

Moody's places little weight at present on the suggestion that any restructuring of medium and long term debt might be 'voluntary' in nature.

 

The decision to downgrade to Caa2 ratings reflects Moody's current assessment of the losses that might be expected from any future restructuring, of between 10% and 20% of amounts due.

However, at this early stage it is very unclear what the government will wish, or be able, to achieve from the proposed 'reprofiling'. In any event, it is likely that negotiations will spill over into the next administration, the objectives of which are not yet known. The decision to leave the ratings on review for further downgrade reflects Moody's view that there is a strong upward bias to losses expected from future negotiations.

Losses are unlikely to be lower than levels consistent with a Caa2 rating, and may be higher. The review period, which may extend beyond the usual three month horizon for reviews, will allow Moody's to assess the consequences for investors of further steps by the current administration or by its successor to restore the government's finances.

 

WHAT COULD CHANGE THE RATING - DOWN

 

Moody's could downgrade the rating if the review were to conclude that losses to investors from the proposed restructurings of government debt will not be consistent with a Caa2 rating. Such a conclusion would most

likely reflect the result of negotiations between investors and the Argentine government, but it could also reflect a further worsening of Argentina's fundamentals including growth and debt.

 

WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL

 

Moody's would confirm the current rating if the terms for restructuring of medium and long term debt limit investor net present value losses to no more than 20%, which is the limit of Moody's expected losses for a

Caa2 rated issuer.

 

NATIONAL SCALE RATINGS

 

Moody's will shortly publish an update to its National Scale Rating (NSR) map for Argentina to reflect the downgrade of the government's long-term issuer rating. Moody's NSRs are ordinal rankings of creditworthiness relative to other credits within a given country, which offer enhanced credit differentiation among local credits.

 

NSRs are generated from Global Scale Ratings (GSRs) through correspondences, or maps, specific to each country. However, unlike GSRs, Moody's NSRs are not intended to rank credits across multiple countries.

 

Instead, they provide a measure of relative creditworthiness within a single country. The full maps can be accessed through the "Index of Current and Superseded Compendia of National Scale Rating Maps by

Country". As a result of the rating action on Argentina and the expected impact on other ratings, the NSR mapping will be revised, from the current modified map based on a Ba3 anchor point, to the standard map

based on a B1 anchor point.

 

GDP per capita (PPP basis, US$): 20,537 (2018 Actual) (also known as Per Capita Income)

 

Real GDP growth (% change): -2.5% (2018 Actual) (also known as GDP Growth)

 

Inflation Rate (CPI, % change Dec/Dec): 47.6% (2018 Actual)

 

Gen. Gov. Financial Balance/GDP: -5.2% (2018 Actual) (also known as Fiscal Balance)

 

Current Account Balance/GDP: -5.3% (2018 Actual) (also known as External Balance)

 

External debt/GDP: 53.5% (2018 Actual)

 

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

 

On 29 August 2019, a rating committee was called to discuss the rating of the Argentina, Government of. The main points raised during the discussion were: the issuer's fiscal or financial strength, including its debt profile, has materially decreased; the systemic risk in which the issuer operates has materially increased; the issuer has become increasingly susceptible to event risks.

 

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018.

 

Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

 

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.