Moody's downgraded Argentina’s credit rating on Friday, cutting it to Ca from Caa2 in a move that reflects the firm’s expectation that private creditors will incur losses as a result of the government’s efforts to restructure its sovereign debt.
The three years of recession and economic malaise put Argentina on a path toward restructuring well before the compounding impact of the deadly novel coronavirus, Covid-19. The virus has caused a pandemic that has infected well over 1 million people in 181 countries, killing nearly 59,000 people as of Friday evening.
“Argentina's government has initiated the process of restructuring about US$ 100 billion in market debt held by private investors as lack of market access has made it impossible to service its debt as currently scheduled,” the firm said in a statement.
Moody’s said the rating reflects the combination of measures such as extension to maturities, lowering of interest rates a cuts to principal amounts of debt held by private investors that will typically result in losses between 35% and 65%.
The negative outlook, Moody’s said, reflects the risk that losses could be beyond the 65% level.
President Alberto Fernández, has said he wants to restructure the foreign currency debt to give the economy time to recover from a recession, currently in its third year.
And his plans for a fast and friendly restructuring to be concluded by March 31 were stalled by the spread of the Covid-19 virus, which Moody’s warned will only compound Argentina’s “deep economic and budgetary challenges” and likely add funding stresses and losses likely to be incurred by bondholders. The estimated debt servicing of Argentine debt in 2020 is approximately US$ 49 billion.
On April 1, the government said it would seek to restructure US$ 83 billion in foreign currency debt with an offer to bondholders that would seek a grace period, an extension in maturities, a reduction in bond coupons and a potential haircut to the principal outstanding.
In February, the International Monetary Fund said Argentina’s servicing of its debt load was unsustainable. At that time the Argentine peso had depreciated by over 40% and sovereign spreads over benchmark US Treasuries blew out by 2700 basis points, net international reserves fell by half and real GDP contracted more than expected.
“As a result, gross public debt rose to nearly 90% of GDP at the end of 2019,” the IMF wrote in a staff technical note on public debt sustainability, published March 19.
By year-end 2019, Argentina’s total debt reached US$ 323 billion, or equivalent to 88% of GDP, the IMF wrote. The multilateral lender is by far the single biggest creditor, at US$44 billion, or 14% of the total.