DBRS Morningstar Downgrades Argentina to SD

DBRS, Inc. (DBRS Morningstar) downgraded the Republic of Argentina’s Long-Term and Short-Term Foreign Currency – Issuer Ratings to Selective Default (SD), from CC and R-5, respectively. The Long-Term Local Currency – Issuer Rating remains at CC, and the Short-Term Local Currency – Issuer Rating remains at R-5. The trend on the Local Currency – Issuer Ratings is Stable. This concludes the Under Review with Negative Implications for all ratings.

KEY RATING CONSIDERATIONS

The Government of Argentina announced on December 20 the postponement of payments on 182-day Letes, dollar-denominated short-term debt issued under local law. In addition, Argentina is seeking to defer interest payments on its long-term foreign currency (and foreign law) bonds. The lower house approved an emergency bill on Friday that grants the administration authority to renegotiate debt terms. Argentina was able to issue the equivalent of US$315 million in local currency debt in local markets on Friday, providing some space for the government to roll over some of its short-term local currency obligations. However, distortionary taxes and restrictions on foreign currency purchases will limit the availability in the local currency funding, particularly if real interest rates move into negative territory as the government seeks to support economic activity. Utility price freezes and other price controls should reduce inflation in the short run, but will do little to strengthen monetary policy credibility. Meanwhile, increased domestic subsidies and disincentives for investment are likely to pose challenges to fiscal and growth dynamics over the medium-term.

The August 30 reprofiling of Argentina’s short-term debt obligations was designed to extend Argentina’s repayment obligations by only six months, leaving decisions regarding macroeconomic policy and debt restructuring to the next government. The Fernandez administration took office on December 10 and has moved quickly to obtain broad authority to reprofile the rest of Argentina’s foreign debts. As a result, the Selective Default is likely to remain in place for some time. It will likely take several months for Argentina to attract sufficient participation a debt exchange, particularly if private creditors are inclined to wait until Argentina has clarified its macroeconomic policy framework and its plans with regard to its outstanding IMF obligations.

RATING DRIVERS

The foreign currency issuer ratings are likely to remain at SD until the government concludes the rescheduling of its foreign currency debts. If the government is unable to rollover maturing local currency debt, the local currency ratings could also be downgraded to SD. Once the restructuring process has concluded, the ratings are likely to be upgraded, depending on the resulting debt profile, the government’s ability to maintain a primary fiscal surplus, and overall progress in curbing inflation, restoring confidence in the peso, and stabilizing the economy.

Notes:
All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments, which can be found on the DBRS Morningstar website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The primary sources of information used for this rating include INDEC, Ministry of Economy, BCRA, Congress of the Republic of Argentina, IMF, World Bank, UN, and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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