Argentina
Press Release

Fitch downgrades Argentina to 'restricted default'

Bnamericas Published: Saturday, August 31, 2019

Fitch Ratings has downgraded Argentina's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'RD' (Restricted Default) from 'CCC', and its Short-Term Foreign- and Local-Currency IDRs to 'RD' from 'C'. The issue ratings on Argentina's senior unsecured foreign-currency bonds have been downgraded to 'CC' from 'CCC'.

KEY RATING DRIVERS

The downgrade of Argentina's ratings to 'RD' follows the government's unilateral extension of repayment on certain debt obligations effective August 30, specifically short-term T-bill instruments issued under local law and denominated in USD and pesos. In accordance with its criteria, Fitch believes Argentina is in default on its sovereign obligations and that this development constitutes a 'distressed debt exchange' (DDE).

Fitch has also downgraded the issue ratings on Argentina's senior unsecured foreign currency bonds to 'CC' from 'CCC', indicating a high probability of DDE or traditional payment default on these securities. The authorities have announced their intention to pursue a re-profiling of select long-term bonds issued under both local and foreign law. The government has indicated it has already started to engage holders of foreign-law bonds in a renegotiation process, and that it will seek additional legal backing from congress to pursue a similar course with holders of local-law bonds.

On August 28, to reduce sovereign liquidity pressures and protect the central bank's international reserves, the government of Argentina announced that it plans to delay repayment of short-term debt instruments (Letes, Lecaps, Lelinks, Lecers) into instalments; 15% on the originally scheduled maturity date, 25% after three months and 60% after six months. Fitch understands that this maturity extension has been imposed on instruments maturing on August 30, and would apply to upcoming maturities in the coming weeks.

Fitch has deemed the maturity extension to be a 'distressed debt exchange' (DDE) in line with its published Sovereign Rating Criteria, given that it entails a material reduction in terms, and has been taken to avoid a traditional payment default, albeit unilaterally via presidential decree rather than a negotiation with creditors. Fitch deems that payment of the short-term instruments under the revised terms will effectively conclude the DDE.

These announcements come after several weeks of extreme financial instability following the August 11 primary elections, in which a strong showing by the opposition candidate indicated a high likelihood of a change in government after October general elections. The election pointed to heightened risks of policy discontinuity and prompted a sharp depreciation of the currency and widening of sovereign spreads, which poses a major setback to macroeconomic stabilization efforts and sovereign financing conditions. Fitch believed these developments had materially increased risks of sovereign default or restructuring of some kind and downgraded Argentina's long-term ratings to 'CCC' on August 16.

In the weeks since the primary election, the sovereign has achieved very low rollover rates among private holders of its short-term T-bill instruments (Letes) in two separate auctions. It was also forced to accelerate USD2.6 billion in repayments of repo facilities to foreign banks due to the sharp fall in market prices of the debt instruments placed as collateral. These developments have already significantly deteriorated the government's liquidity position. These repayments, further withdrawals of USD deposits in the banking system, and FX intervention by the central bank (BCRA) to contain the depreciation of the peso have resulted in a significant decline in international reserves of the central bank (BCRA).

This is a press release by Fitch Ratings.

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