DBRS Downgrades Argentina to “B (low)”, Under Review with Negative Implications

DBRS, Inc. (DBRS) has today downgraded the Republic of Argentina’s long-term foreign currency issuer rating to B (low), and the short-term foreign currency rating to R-5. Argentina’s long-term local currency rating has been confirmed at B, and the short-term local currency rating has been confirmed at R-4. The long-term foreign currency issuer rating and all local currency ratings remain Under Review with Negative implications (URN). The trend on the short-term foreign currency rating (which now corresponds to the lowest rating on DBRS’ short-term rating scale) has been revised to Stable.

On Friday, August 23, the U.S. Court of Appeals affirmed a New York District Court ruling that seeks to compel Argentina to repay in full its past due debts to holdout creditor NML Capital Limited (NML) the next time Argentina makes a payment on its restructured bonds. Although the Court of Appeals extended the stay on its ruling until the U.S. Supreme Court makes a decision on whether to hear the case, DBRS believes that this ruling materially increases the risk of a default on Argentina’s restructured bonds issued under New York law, and is a key trigger for today’s downgrade. If the Supreme Court declines to hear the case, or if it hears the case but upholds the ruling, DBRS is likely to downgrade the foreign currency rating further, to CCC or lower. The URN reflects continued uncertainty regarding the Supreme Court’s willingness to hear the case and the implications this could have for a default by Argentina.

Both foreign and local currency ratings could come under pressure if Argentina fails to make needed policy adjustments and restore the credibility of its macroeconomic framework. Conversely, stronger fiscal policies following the upcoming elections in October and a serious effort to rein in inflation, particularly if supported by a recovery in Brazil and in advanced economies, could stabilize Argentina’s ratings.

Argentina’s strong growth and earlier fiscal performance have significantly reduced indebtedness, which provides some support to its credit rating. The debt maturity profile remains relatively comfortable, though 2015 is likely to be a challenging year if market access has not been restored. DBRS remains concerned about the continued strains from Argentina’s inconsistent mix of fiscal, monetary, trade and exchange rate policies. Fiscal performance continues to deteriorate in the lead up to Congressional elections on October 27, 2013, reflecting the rise in subsidy costs. Reserve losses have accelerated, declining by $5 billion since the beginning of 2013. In the context of Argentina’s disputes with external creditors, the risk of a default on foreign currency debt in particular remains very high. Local currency financing sources remain adequate, but reliance on central bank financing is a key contributor to Argentina’s high rate of inflation.

Compounding these challenges, DBRS expects that Argentina could choose to default on its performing foreign currency denominated exchange bonds rather than make a payment to NML. It remains unclear whether Argentina will be willing to service all of its local currency denominated debt, particularly if any holders of peso-denominated bonds are located outside of Argentina. The government announced on Monday, August 26 that it would send to Congress a bill to reopen the 2010 debt exchange. This would be unlikely to prevent a default, since the existing holdouts continue to press for full payment. In addition, the government announced plans to launch an exchange of bonds issued under U.S. law for new securities issued under Argentine law if the U.S. Supreme Court affirms the ruling against Argentina. However, even if Argentina is successful in obtaining 100% participation of exchange bondholders in the new debt exchange, the terms of this exchange as announced by President Fernández de Kirchner appear likely to reduce the value of bondholder claims, and could consequently still be considered a default by DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include the Ministerio de Economía y Finanzas Públicas, BCRA, INDEC, the International Monetary Fund, the World Bank, U.S. Court of Appeals for the Second Circuit (New York), United States District Court for the Southern District of New York, and various private sector research analysts. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Thomas Torgerson
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 6 September 2007
Most Recent Rating Update: 15 February 2013

For additional information on this rating, please refer to the linking document under Related Research.