TEXT-Fitch cuts Argentina's rating to 'CC'

Tue Nov 27, 2012 4:09pm EST

Nov 27 - Fitch Ratings has downgraded Argentina's long-term foreign currency
(FC) Issuer Default Rating (IDR) to 'CC' from 'B' and the short-term IDR to 'C'
from 'B'. All securities issued under international law have been downgraded to
'CC' while both FC and local currency (LC) denominated securities issued under
Argentine Law have been downgraded to 'B-'. Fitch has also downgraded
Argentina's LC IDR to 'B-' from 'B'; the Outlook on the LC IDR is Negative. The
Country Ceiling has been downgraded to 'B-' from 'B'.

The downgrade of the long-term foreign currency IDR reflects Fitch's view that a
default by Argentina is probable. The increased probability that Argentina will
not service its restructured debt securities issued under New York law on a
timely basis reflects US District Judge Griesa's decision on Nov. 21 to remove
the stay order on the ruling that Argentina must pay US$1.33 billion to holdout
investors concurrent with or prior to its payments due to holders of the 2005
and 2010 restructured debt. The stay order will be removed with effect from Dec.
15.

Argentina is due to pay approximately USD3 billion of GDP-linked warrants on
Dec. 15, 2012. A missed payment on the GDP-linked warrants could trigger a cross
default on all exchanged debt securities issued under international law.
Subsequently, a missed coupon payment of any other external securities would
also trigger a cross default on all exchanged bonds issued under international
law.

Following the US Court of Appeals decision to uphold Judge Griesa's ruling that
Argentina breached the 'Equal Treatment Provision' of the original New
York-based law bonds that defaulted in 2001, the court remanded the case back to
Griesa for specific clarifications on how the ratable payment formula would work
and to which third parties the injunctions should apply. On Nov. 21, Judge
Griesa explained that the clarifications requested of his court by the superior
court 'did not affect the basic ruling that there can be no payments by
Argentina to exchange bondholders without an appropriate payment to plaintiffs'.

In light of Argentina's official statements that the government will not honor
the court's decision and the country's 2005 'Lock Law' which prohibits the
government from re-opening the exchange or from conducting any type of
settlement with holdouts without prior authorization from Congress, Judge Griesa
decided that the stay should be lifted 'at the earliest possible time' so there
is more assurance against a possible evasion. The Dec. 15 date 'gives some
reasonable time to arrange mechanics' and allow the Appeals Court to consider
the merits of the circuit court's clarifications on the two issues at stake.

According to the ruling, the payment due to the plaintiffs should be made into
an escrow account by Dec. 15 with the provision that it could be adjusted by any
modifications that the Court of Appeals may impose subsequently.

The Argentine government is in the process of challenging Judge Griesa's
decision in the U.S. Appeals Court and has also announced its intention to take
the case to the U.S. Supreme Court if needed, although it is not clear if the
Supreme Court will agree to preside on the matter.

Fitch will continue to monitor how the case evolves and the Argentine
government's response in the coming weeks. A missed payment on exchanged debt
securities issued under NY law (including the GDP-linked warrants), which
remains uncured within the stipulated 30 days grace period, would constitute a
default event. In such a scenario, on expiry of the grace period Fitch would
move Argentina's FC IDR to 'RD' (Restricted Default) and the bond ratings of the
affected securities to 'D' (Default). On the other hand, a positive resolution,
under which the Argentine authorities decided to pay the plaintiffs in line with
the court ruling, and which therefore allowed the sovereign to continue
servicing its NY-law external debt without interruption after the Appeals
Court's final ruling, would be reflective of its willingness to pay and lead to
a positive rating action on the FC IDR.

Fitch's downgrade of Argentina's local currency IDR reflects the sustained
deterioration of its credit fundamentals. The uncertainty related to the impact
of the U.S. Court ruling is likely to further damage confidence and intensify
political and social tensions in the country and undermine growth prospects.

Argentina's economy has decelerated sharply in 2012 owing to the increased state
intervention. This has been highlighted by the progressive tightening of capital
controls, the nationalization of YPF and the inability of certain provinces to
access USD to repay their dollar-denominated debt under local law. While the
authorities have been able to stabilize international reserves by progressively
tightening capital controls, this has come at the expense of increased economic
distortions. The sustainability of this strategy is also vulnerable to
international commodity prices, especially soy.

The concentration of power in the executive continues to undermine policy
predictability and contributes to a tense and polarized political climate in
Argentina. The recent massive protests indicate a general public dissatisfaction
with issues ranging from high inflation, stringent FX controls, weakening
infrastructure and corruption allegations. The authorities' disregard for
popular protest and their rhetoric suggests that interventionist policies that
lead to further concentration of power and increase economic distortions are
likely to intensify. As a consequence, further deterioration in Argentina's
policy framework is possible, which could adversely impact the country's medium
term growth prospects.

The steady attempts by Argentine authorities to 'Pesofy' the economy, the recent
intervention in the insurance sector to redirect 15% of their investments to
real-economy projects and the recently approved financial system reform are all
indications of the trend towards further financial repression or interventionist
policies.

Sustained economic weakness that heightens fiscal pressures, which in the
context of limited financing flexibility could lead to significant erosion of
international reserves and greater monetization of the fiscal deficit with
adverse repercussions for inflation, would increase downward pressure on the
rating. A material escalation of inflation from the already high levels could
undermine Argentina's fragile equilibrium as depreciation pressures would mount
due to erosion of competitiveness.

Alternatively, improvement in the overall policy stance that leads to
sustainable growth and greater financing flexibility would stabilize the rating.
Improvement in the transparency of official data and normalization of relations
with creditors and multilaterals would also buttress confidence.

Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:
--'Sovereign Rating Methodology' (Aug. 13, 2012).

Applicable Criteria and Related Research:
Sovereign Rating Methodology
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