An upgrade of Argentina’s credit rating depends on the government taking measures to boost data credibility while compensating investors holding defaulted debt and companies for expropriated assets, said Gabriel Torres, Argentina’s sovereign credit analyst at Moody’s Investors Service.
Moody’s rates Argentina’s local-law dollar bonds at B3, or six notches below investment grade. In March the ratings company cut the country’s foreign-law bonds one level to Caa1, the same as Cuba and Belize, to reflect increased default risk from the country’s legal fight with holders of defaulted bonds in U.S. courts. The local-law B3 rating has been in place since 2005.
A U.S. Appeals Court upheld previous orders saying Argentina must pay 1.33 billion dollars to holders of non-performing bonds from the country’s 95 billion dollars default in 2001, led by hedge fund Elliott Management Corp. The effects of the ruling are being delayed until the U.S. Supreme Court decides whether to review the case. Any decision on paying the so-called holdouts would probably be a political decision, Torres said.
“Argentina has enough money; it’s a political decision not to pay” Torres said on Thursday in at a Moody’s conference in Buenos Aires. “It’s positive that political decisions are easier to change than a big fiscal deficit or excessive debt.”
The payment would represent 3.8% of the country’s 34.7 billion of foreign currency reserves.
However Torres advanced that the most likely scenario is that the US Supreme Court rules against Argentina and then the credit rating could be lower. But he pointed out two different situations: if Argentina enters in default for legal reasons in its debt under foreign legislation, and does not impact the rest of its sovereign debt, “it’s possible that the downgrading will be only for the first case”.
But much will depend on Argentina’s reaction: if it finds credit probably in Europe to pay and then decides who can collect and who can’t.
Argentina has argued that an unfavourable ruling would imperil and threaten all sovereign debt re-structuring, with an major impact on world finances. The IMF and France among others and the US Treasury at some point have upheld such arguments.
President Cristina Fernandez has vowed to only pay the holdouts a fraction of their claims, or about 30% of face value in line with what other investors received in restructurings in 2005 and 2010.
South America’s second-largest economy could improve its credit quality by reporting more reliable economic data, letting the IMF conduct its Article IV review on economic policies and resolving pending arbitration cases, according to Torres.
It’s the government’s lack of credibility and unwillingness to pay part of its debt that pushes Argentine credit risk to the highest in the world, even as the country is growing faster and has lower debt ratios and greater gross domestic product per capita than most of its peers in Latin America, underlined Torres.
The cost to protect against Argentine default in five-years with credit-default swaps is the highest in the world at 2,455 basis points, according to data compiled by CMA Ltd. The extra yield investors demand to own Argentine debt instead of U.S. Treasuries is 1,022, the third-highest in emerging markets.