MercoPress. South Atlantic News Agency

Fitch ratings lowers Argentina Par bonds under foreign law to “D”

“Economic conditions have deteriorated significantly in 2014, with GDP expected to post a -1.9% contraction this year”, Mosquera, Fitch's Latam Director

Fitch ratings on the last day of October downgraded Argentina's Par bonds issued under Foreign Law to 'D' from 'C', after the country failed to complete an interest payment, raising the risk that creditors could demand that its cash-strapped government immediately repay all of its debt.

 Argentina last month deposited a 161 million payment with a newly appointed local trustee to try to circumvent US court orders for it to settle with “holdout” investors suing for full repayment of bonds from a 2002 default before paying 93% of debt-holders who accepted a restructuring in 2005 and 2010.

“Argentina's failure to cure its missed coupon payments on Oct. 30 constitutes a default under Fitch Ratings' criteria and has led to a downgrade of the affected securities to 'D'. The government's inability to reach a resolution will continue to affect already difficult economic conditions and prospects in Argentina”, according to a new Fitch report published on Friday.

“Economic conditions have deteriorated significantly in 2014, with GDP expected to post a -1.9% contraction this year, after a 3% expansion in 2013”, said Santiago Mosquera, Director in Fitch's Latin America Sovereign Group.

“We anticipate the economy will contract even further, by -2.6% in 2015, if Argentina fails to clear the default before presidential elections are held in October next year. This should lead to additional pressures on inflation, exchange rate and reserves”.

Likewise deficit monetization due to a lack of financing options has fueled annual inflation in 2014 (41.1% according to private estimates by 9M14). The election cycle and a potential decision to mitigate negative side effects from the default could lead to an additional widening in the fiscal deficit and its monetization in the context of constrained financing, further undermining inflation and exchange rate dynamics.

Argentina's external position is expected to continue to weaken in light of lower soy prices, contained sales of soy exports, strong demand for foreign exchange by local economic agents, limited capital inflows and a demanding external debt servicing calendar.

Fitch estimates that international reserves could dip below 18bn dollars next year, when the central government faces over 12bn in foreign currency debt service.

“As a cure of the default under the current administration is far from assured, both the business community and the opposition are looking beyond the 2015 presidential elections”.

“The next administration could potentially implement a more pragmatic economic program and attempt to resolve the sovereign default to improve financing flexibility. With a recovery in capital flows and cross-border financing under this scenario, GDP growth could be restored in 2016. However, growth would not pick up until 2017, as the unwinding of distortions created over the past few years will likely prove to be challenging”.