MercoPress. South Atlantic News Agency

Kirchners' Argentina debt rating drops to Paraguay level

Argentina's foreign debt rating was cut Monday by Standard & Poor's from B+ to B, five levels below investment grade and in line with countries such as Jamaica and Paraguay. Concerns over slower economic growth, lower tax revenue and mounting investor mistrust in inflation data which erodes confidence in the government have been decisive for the new rating.

Argentina faces "increasing economic challenges" S&P analyst Sebastian Briozzo wrote in a statement. "Inflation and fiscal and financial strain have increased while the likelihood of the government taking prompt corrective measures to staunch the loss of creditworthiness remains low". Argentine bonds tumbled last week after President Cristina Fernandez de Kirchner defended the government's inflation data during her first press conference on August 2. While government data puts annual inflation at 9.1%, S&P said "private estimates suggest that it might actually be about 24 to 28%''. S&P announced the rating cut less than an hour after Argentina's statistics agency said the monthly inflation rate fell to 0.4% in July, the lowest level since June 2007. S&P's Monday move brings its rating on Argentina within one level of the B3 rating Moody's Investors Service gives the country. Gabriel Torres from Moody's anticipated last Friday that the ratings company was considering cutting Argentina's debt outlook from positive because the underreporting of inflation "raises serious questions about their willingness to pay". Yields on Argentina's benchmark 8.28% US dollar bonds due in 2033 soared 1.42 percentage points in the seven days through August 8 to 12.17%, according to JPMorgan Chase & Co. The bonds rebounded on Monday after the government said it planned to buy back some of the securities. The yield dropped 62 basis points, or 0.62 percentage point, to 11.55% as the price rose 3.95 cents to 71.85 cents on the dollar. Argentina's debt payments are scheduled to increase in 2009, four years after the country restructured 95 billion US dollars of defaulted bonds. Principal and interest payments are to climb from about 14.6 billion this year to 18.2 billion next year and 17.7 billion in 2010, according to the government's 2008 financing report. S&P rating cut "came out at the time it had to come out" said Claudio Loser, a former director of the Western Hemisphere Department for the International Monetary Fund. "There is a slowdown and the debt situation is complicated and will also be complicated in 2009" he emphasized. Argentina's debt rating now stands five levels below the competing economies of Brazil and Peru. Signs are emerging that growth is slowing in Argentina. The construction industry shrank a seasonally adjusted 8.8% in June from May, the most in four years, according to the government. A recent slide in commodity prices may add to the slump since Argentina is the world's third-largest soy producer and among the leading exporters of wheat, sunflower and corn. S&P's rating made the Buenos Aires stock exchange tumble 3.81% on Monday, helped also by the sale of shares linked to the hydrocarbons industry following the slide in international oil price. The Merval index dropped to 1.708.95, its lowest since the second half of October 2006.