Argentina slammed by double downgrade at end of traumatic week

Argentina was downgraded deeper into junk territory by two of the three biggest ratings companies as markets brace for a possible default after the populist opposition won a landslide victory in Sunday’s primary election.

Fitch Ratings cut Argentina’s long-term issuer rating by three notches to CCC from B, putting the South American nation on par with Zambia and the Republic of Congo. S&P lowered the country’s sovereign rating to B- from B and slapped a negative outlook on it.

The move caps a traumatic week for Argentina that saw the peso fall to a record, the benchmark equity gauge suffer one of the worst daily routs in 70 years and the yield on the nation’s century bonds spike to an all-time high. S&P cited Argentina’s “vulnerable financial profile” and the slump in asset prices following the primary.

“Uncertainty continues on the private sector’s predisposition to roll over government debt and hold pesos while depreciation stresses the government’s high financing needs,” S&P analyst Lisa Schineller wrote in a statement accompanying the downgrade.

As of March 31, Argentina had $33.7 billion in foreign-currency debt payments due by year-end, the vast majority in short-term Treasury bills, or Letes, according to the latest debt report by the Finance Ministry.

Fitch’s said the deterioration in the macroeconomic environment “increases the likelihood of a sovereign default or restructuring of some kind.”

Argentine bonds had started to recover from the worst of this week’s rout. The average spread on sovereign bonds tightened 80 basis points today, after earlier narrowing 128 bps, according to a JPMorgan index.

Past Populism

Opposition candidate Alberto Fernandez trounced President Mauricio Macri in the primary, giving him a seemingly unassailable lead ahead of October’s presidential election. Investors fear that victory for Fernandez will mark a return to the populist policies of the past and a likely default.

Moody’s Investors Service already rates the nation’s notes at five levels below investment grade.

This week’s slump in assets resulted in large losses for some of the world’s biggest money managers, who piled into Argentine assets in a search for yield.

It may already be too late for Argentina to avoid a default, according to Siobhan Morden, a New York-based strategist at Amherst Pierpont Securities. She said the weakening peso will push debt ratios even higher.

Rising Debt

Fitch said it expects Argentina’s federal government debt to climb to around 95% of gross domestic product this year, without even factoring in the risk of a further slide in the currency. Meantime, South America’s second-largest economy will probably contract 2.5% by year-end, Martinez said.

Financing pressures could intensify in 2020 when the sovereign will need to turn to the market to finance a fiscal deficit and some $20 billion in debt maturities as the nation’s disbursements from the International Monetary Fund run dry, according to Fitch.

“Both roll-over and fresh financing could be difficult if local and external borrowing conditions do not improve markedly from current stressed levels,” Martinez said.