Argentina Bonds Extend Drop After S&P’s ‘Selective Default’ Call

Argentina Bonds Extend Drop After S&P’s ‘Selective Default’ Call

Argentina’s bonds extended declines as S&P Global Ratings cut the South American nation’s foreign- and local-currency credit ratings to “selective default” after it said it would delay payments on short-term local debt.

The government will postpone $7 billion of payments on short-term local notes held by institutional investors this year and will seek the “voluntary reprofiling“ of $50 billion of longer-term debt, Economy Minister Hernan Lacunza said Wednesday evening. It will also start talks over repayments on $44 billion it has received from the IMF. While the plan could relieve short-term pressures, it raises the prospect of defaults further down the line, according to Credit Agricole SA.

“On the bright side, some welcome efforts to lower the country’s liquidity constraints,” said Sebastian Barbe, the Paris-based head of emerging-market strategy at Credit Agricole. “However, on the dark side, some other investors mention that this would be only a temporary and partial fix, and that, given Argentina’s challenged solvency, the risk could be another default in the future. We remain very cautious on Argentina and the peso.”

Argentina’s peso and bonds have tumbled after opposition leader Alberto Fernandez routed President Mauricio Macri, a market favorite, in an Aug. 11 primary vote. The peso is down more than 20% since then and bonds have hit record lows, with investors pricing in an over 90% chance of default in the next five years.

Dollar securities maturing in 2021 fell 1.4% to 45.3 cents on the dollar by 11:15 a.m. in London on Friday, bringing the decline this week to 21%. Notes due 2026 slipped 0.5% to 41.3 cents.

“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 Aug. 28,” S&P said in a statement. “This constitutes default under our criteria.”

Since new terms for the short-term debt came into effect immediately, S&P considers the default “cured” and will raise Argentina‘s long-term sovereign credit rating to CCC- on Aug. 30, it said.

The upset in the primary election had already led two of the three biggest ratings companies to downgrade Argentina. On Aug. 16 Fitch cut the country’s long-term issuer rating by three notches to CCC from B, while S&P lowered the country’s sovereign rating to B- from B and slapped a negative outlook on it.

IMF officials who were visiting Argentina at the time of the announcement said they are analyzing the measures.

‘Safeguard Reserves’

“Staff understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves,” the lender said in a statement.

The fund was expected to disburse another $5.3 billion in the next few months from a record $56 billion agreement, though that’s far from certain given the current crisis.

Without the loan disbursement and cut off from global money markets, the country was facing a serious financing challenge. Morgan Stanley estimated Argentina needed $12.9 billion for repayments on Treasury bills and bonds in the last four months of the year. Most of those payments have now been pushed back to next year.

Meanwhile, the country’s dollar buffers are withering. Foreign exchange reserves have fallen to $57.5 billion, and Capital Economics estimates that net reserves -- which exclude deposits at commercial banks -- are currently at $19 billion, down from $30 billion in mid-April. That only covers a quarter of Argentina’s gross external financing needs of $100 billion, which includes debt maturing over the next year plus the current account deficit.

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