Fitch Ratings agency announced on Tuesday it has downgraded Argentina's long-term foreign currency Issuer Default Rating from B to CC, with a negative outlook, as it sees a probable default if the country misses its payment to holdout investors.
The agency stated in a communiqué that the increased probability that Argentina will not service its restructured debt securities issued under New York law on a timely basis reflects US District Judge Griesa's decision on Nov. 21 to remove the stay order on the ruling that Argentina must pay 1.33 billion dollars to holdout investors concurrent with or prior to its payments due to holders of the 2005 and 2010 restructured debt.
Fitch assured that a missed payment could lead to a cross default on all exchanged debt securities issued under international law.
A missed coupon payment of any other external securities would also trigger a cross default on all exchanged bonds issued under international law, it continued.
Fearing Argentina will disobey his order, Griesa wants 1.33 billion deposited in a US escrow account by Dec. 15 to ensure payment if all appeals trying to overturn or block his decisions fail.
The holdout investors are suing to recover the full value of bonds that Argentina stopped paying in 2002, setting up a battle with the country's government which brands them as vulture funds and has refused to pay them.
Fitch put a negative outlook on the credit which is two steps away from outright default.
Argentina has vowed not to pay the holdout investors, led by Elliott Management's NML Capital Ltd and Aurelius Capital Management, prompting Griesa to order the payment be made before the 2nd Circuit rules on his decision.
Fitch highlighted Argentina's 2005 Lock Law which prohibits re-opening the exchange or from conducting any type of settlement with holdouts without prior authorization from Congress as a likely reason that payment will not be made.
If no payment is made a technical default would ensue, with uncertainty remaining over treatment of credit default swap contracts, which have surged in prices as investors scramble for protection from a default or restructuring.
The uncertainty related to the impact of the US Court ruling is likely to further damage confidence and intensify political and social tensions in the country and undermine growth prospects, Fitch said in its statement.
While the authorities have been able to stabilize international reserves by progressively tightening capital controls, this has come at the expense of increased economic distortions. The sustainability of this strategy is also vulnerable to international commodity prices, especially soy, Fitch said.