MercoPress. South Atlantic News Agency

S&P and Argentina in six months: “default or distressed debt exchange”

“We could revise the outlook on the long-term ratings to stable if threats to debt servicing were to unexpectedly diminish”

Standard & Poor's cut its rating of Argentina's long-term foreign currency debt rating to CCC- from CCC+ with a “negative” outlook. A CCC rating is defined as “currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments,” according to S&P.

 The ratings agency noted Tuesday that Argentina will owe 225 million to bondholders on June 30 and is also scheduled to pay tens of millions of dollars more in interest in September and December.

That, according to S&P, raises the possibility of default. “Although neither is certain, a default or a distressed debt exchange pertaining to currently serviced debt appears to be inevitable within six months, in our view, absent unanticipated significantly favorable changes in Argentina's circumstances” said S&P.

“We could revise the outlook on the long-term ratings to stable if threats to debt servicing were to unexpectedly diminish, combined with steps that boost external liquidity in order to meet substantial external debt amortization next year,” S&P added.

S&P said that the new rating reflected the US Supreme Court's decision on Monday to not revisit a lower-court order for Argentina to pay so-called “holdout” bond holders. The hedge fund holdouts ('vulture funds') were part of a small group who refused to accept less money for their bonds and have for years sought full payment on the 1.33 billion they are owed. US courts have ruled that the holdouts must be paid at the same time as the owners of new discounted bonds.

“The negative outlook reflects the likelihood of a further downgrade based on possible payment interruptions or the announcement of what we could consider a distressed debt exchange,” S&P said. “Either a payment interruption or a distressed debt exchange would lead us to lower our rating on Argentina to [selective default].”

Meanwhile in the local currency market, the US dollar was traded in the parallel market at 12.20 Pesos, up 35 cents from Monday, given the uncertainty surrounding President Cristina Fernandez speech on Monday.

The 'official' dollar kept trading at 8.15 Pesos in Buenos Aires City banks. The Central bank acquired 70 million dollars with total reserves climbing 12 million to reach 28.845bn dollars. The interbank one day rate or 'call money' was also up reaching 31.5%, the highest since last 30 December.