Argentina has defaulted on its debt, according to Standard & Poor’s, the rating agency, widening the fallout from its plan to delay payments on $101bn of borrowings.
Buenos Aires announced earlier this week that it would postpone $7bn of payments on its short-term local bonds for up to six months while it pushes for a “voluntary reprofiling” of $50bn of longer-dated debt mostly owned by foreign investors. The government also said it plans to delay repayment of $44bn of loans from the IMF.
Argentina has already defaulted on its debt eight times, twice since the turn of the millennium.
The rating agency said on Friday it was lowering Argentina’s credit rating to “selective default”.
The declaration came after President Mauricio Macri’s government failed to sell new short-term bonds, leaving it struggling to find the cash for hefty upcoming repayments. Some $30bn in debt falls due this year alone, according to Capital Economics.
“Following the continued inability to place short-term paper with private-sector market participants, the Argentine government unilaterally extended the maturity of all short-term paper on August 28,” S&P said in a statement on Friday. “This constitutes default under our criteria.”
Argentina’s finance ministry cast the S&P ruling as a technicality and predicted the agency would quickly reverse the decision, following the government’s publication on Friday of a new payment schedule which will go into effect on Saturday.
Argentina’s bonds and currency have slumped since Mr Macri — who had been a popular figure with international investors — suffered an unexpectedly heavy defeat in a primary election which all but ended his hopes of re-election in October.
Those losses deepened following S&P’s announcement. The peso edged lower to trade at about 58 pesos per dollar. Argentina’s dollar bond maturing in 2021 slipped to a price of 44 cents on the dollar, pushing its yield up to over 70 per cent. The country’s 100-year bond, which had been snapped up by investors two years ago amid a wave of optimism over Mr Macri’s economic agenda, fell just below 40 cents on the dollar.
At those levels, investors say a default is already priced in, given that 40 cents on the dollar is within the range of estimated recovery value of the bonds. Much depends on the planned economic policies of opposition candidate Alberto Fernández — who is slated to win the presidential election in October — as well as the relationship he seeks to maintain with the IMF.
Two of the big three rating agencies lowered Argentina’s credit rating after the primary result. The resounding victory for Mr Fernández, whose running mate is former president Cristina Fernández de Kirchner, stoked concerns about the return of populist policies. Two weeks ago, Fitch lowered the country’s long-term issuer rating by three notches to CCC, while S&P cut its own rating to B-minus.
The further action by S&P makes it the first agency to label Mr Macri’s debt plans a default — despite the government’s attempts to describe the arrangement as “voluntary”.
S&P also said it was lowering Argentina’s long-term rating to CCC-minus due to risk of a further default. The agency said: “The heightened vulnerabilities of Argentina’s credit profile stem from the quickly deteriorating financial environment, the absence of confidence in the financial markets about policy initiatives under the next administration — elections are not until October — and the inability of the Treasury to roll over short-term debt with the private sector.”
It added: “This has immensely stressed debt dynamics amid a depreciating exchange rate, a likely acceleration in inflation, and a deepening economic recession.”
S&P is not alone is warning about another default. Carlos de Sousa at Oxford Economics said he sees Argentina’s debt as “too high to be deemed sustainable, even under optimistic assumptions”. For this reason, he said the next government will be forced to undertake another restructuring.
A CCC-minus rating means debt is “currently vulnerable to non-payment and is dependent upon favourable business, financial, and economic conditions” for the borrower, according to S&P’s ratings schedule.