Argentina’s credit rating was cut one level by Standard & Poor’s, which referred to a US appeals court ruling that prevents the country from honouring its debt without also paying holders of its defaulted bonds.
S&P lowered the country’s rating to B- from B, which is six levels below investment grade and in line with that of Jamaica, Pakistan and Belarus, according to an e-mailed statement on Tuesday.
The New York Court of Appeals said Oct. 26 that Argentina can’t make payments on restructured sovereign debt while refusing to pay holders of its defaulted notes because doing so would discriminate against bondholders.
“The downgrade of Argentina’s unsolicited rating reflects our opinion that the government may face increasing risks in the management of its debt after the U.S. appeals court ruling,” S&P said in the statement. “The decision may effectively increase Argentina’s liabilities and the government’s debt service.”
The decision may help creditors including hedge fund Elliott Management Corp. collect 1.4 billion dollars on defaulted debt. The perceived risk Argentina will renege on creditors is now the highest of any government in the world on speculation the administration of President Cristina Kirchner will opt to cease all dollar debt payments rather than settle with the holdouts.
The cost to insure Argentine debt against default soared as much as 576 basis points, or 5.76 percentage points, to 1,534 basis points after the ruling. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals 1.000 dollars annually on a contract protecting 10 million dollars of debt.
Likewise the extra yield investors demand to own Argentine government dollar debt instead of US Treasuries surged 173 basis points to 1.024 basis points since the decision, according to JPMorgan Chase & Co.
Elliott, with 1.6 billion in claims stemming from Argentina’s record 100 billion default in 2001, rejected offers to swap the notes for 30 cents on the dollar and wants the nation to pay in full.
Earlier in the day Fitch Ratings also cut Argentina’s credit outlook to negative. Argentina’s B rating on its long- and short-term foreign currency debt was placed on credit-watch negative, according to a statement.