UPDATE 3-Moody's cuts Argentina bond rating, says reserves in 'semi-freefall'

Mon Mar 17, 2014 7:32pm EDT

Related Topics

March 17 (Reuters) - Moody's Investors Service cut Argentina's government bond rating further into junk on Monday, saying a sharp drop in central bank dollar reserves has raised concern about the country's ability to service foreign debt.

The credit ratings agency downgraded the rating to 'Caa1' from 'B3,' and revised its outlook to stable from negative.

A major driver behind the decision to downgrade came from tumbling levels of foreign exchange reserves, which Moody's analyst Gabriel Torres called a "semi-freefall."

"What we're going to be looking at more than anything now is reserves," said.

"If Argentina enhances its funding options, whatever that may be - from tapping markets, to greater bilateral lending, to greater capital inflows, to whatever the options are that make it easier for them - then those are all credit positive actions," Torres said.

The country's reserves have plunged to $27.5 billion from a high of $52.7 billion in 2011, according to Moody's.

Argentina has been cut off from international capital markets since its 2002 sovereign bond default, while other potential investment has been chased away by high inflation.

The central bank uses its international reserves to make payments on the government's foreign debt, finance imports and prop up the overvalued peso currency through regular interventions in the foreign exchange market.

The grains-exporting country could access IMF funding, Torres said, "but they would have to have a completely different relationship with the IMF than they have today."

Argentine President Cristina Fernandez has won popular support by criticizing the IMF's orthodox policy prescriptions for the country's economic woes, which include annual inflation estimated by private economists at more than 30 percent, one of the highest rates in the world.

Argentina, which at the start of the 20th century was one of the richest in the world, has been weakened by decades of financial mismanagement. Its boom-bust cycles reached an apex when the 2002 crisis tossed millions of middle-class Argentines into poverty.

Investors are guardedly optimistic that the next leader of Latin America's third-largest economy will adopt more market-friendly policies. Fernandez's second term ends late next year.

The Paris Club last week invited Argentina to negotiate payment of its overdue debt. Talks starting in the week of May 26 could be an important step toward settling the long-running debt dispute and paving its re-entry into the debt markets.

The website of the Paris Club, an informal group of official creditors, says that the Club met for the first time in 1956 at the behest of Argentina, which was concerned about defaulting on its sovereign debt.

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
GermanHoldout wrote:
Argentina has not been paying its debt to the Holdouts since 2002, Argentina is in selective Default (SD) since 2002!!

Argentina’s rating should therefore be “SD” since 2002. (and not B* or C*)

How is it possible, that Moody’s and the others rating agencies do not realize it?

Also the Holdouts invite Argentina to negotiations to settle its outstanding debt!

Argentina should solve not only the Repsol and Paris Club but also the Holdout Problem!

We are in contrast to Repsol and Paris Club human beings!

Argentina’s nightmare default, this since 2002 ongoing HORROR must finally have an end!!!

To reach an agreement with the holdouts would probably take only few hours…

We, the holdouts, have been suffering for more than a decade!!

Since 2002, Argentina has not paid a cent to the holdouts!

President Obama should help and talk to President Kirchner to end Argentina’s Horror-Default.

President Kirchner (by the way a beautiful women) should end this since 2002 ongoing HORROR-Default and solve the holdout Problem NOW!

In the “Pari Passu” issue the Holdouts are 100% right! There is nothing to discuss. In the bond contracts “Pari Passu” is clear defined. Also, in the bond contracts Argentina has explicitly waived its sovereign immunity.

It would be helpful, if the US Supreme Court promptly rejected Argentina’s unjustified appeal.

The argument:->
“If the U.S. courts uphold the Holdout’s position, as negative consequences , Sovereign debt restructurings will be virtually impossible in the future.”
is NOT TRUE because, after Argentina’s 2001 Default all bonds imply the Collective Action Clause (CAC) A collective Action clause (CAC) allows a supermajority of bondholders (75%) to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring.
BUT, This CAC is NOT implied in Argentina’s repudiated old bonds!
Accordingly, Argentina MUST fulfill the bond contracts and repay the debt to the holdouts!

Also the Argument-> “The country has said that forcing it to pay the defaulted bondholders immediately would expose it to $43 billion in additional claims it can’t pay and trigger a new default. ”
is NOT TRUE, because the clause “Rights Upon Future Offers (RUFO)” ends in December 2014. That means, that from 01/01/2015 Argentina can make a better offer to the Holdouts, than it made in 2005 and 2010. Hence, additional claims from Exchange bondholders is completely ruled out.

Argentina should rather sit down and negotiate an acceptable solution with the Holdouts!

The cause of Argentina’s decline is the largest financial crime in world history, this since 2002 ongoing HORROR-Default.

U.S. Senators Rubio and Menendez meant under undemocratic Argentina, that Argentina does not pay its debt.

Non-payment of debt since 2002 to the Holdouts, breaching of bond-contracts are criminal and are highly undemocratic!

Argentina as a great country must reenter the world!

For reentering the world, Argentina must end this HORROR-Default!
Argentina’s nightmare default, this since 2002 ongoing HORROR must finally have an end!!!

Beyond the U.S. Hedge Funds there are still tens of thousands retail Holdouts worldwide, most of them from Italy and Germany.

Most of the Holdouts are “before default buyer”, who have bought their bonds at an average of 100% or even higher.

Argentina clearly has the capacity to repay the debt to the holdouts after more than a decade! The outstanding debt is only approximately 12 Billion. (incl. accrued interest) It is not much for the 3. largest economy in South America.

The “Lock Law” ends as of 12/31/2014. (End of the “Rights Upon Future Offers (RUFO) clause in December 2014.) That means, that from 01/01/2015 Argentina can make a better offer to the Holdouts, than it made in 2005 and 2010.

If Argentina and the holdouts made NOW A BINDING AGREEMENT with respect to the “time after” (end of the “Rights Upon Future Offers (RUFO) clause in December 2014), seizure risks and a technical Default would be immediately averted. Argentina could immediately return to the capital market and thus Argentina could refinance the payments to the holdouts, without using reserves.
Holdouts want a simple, clear, secure and an ACCEPTABLE solution.
Holdouts DO NOT want such exotic financial constructs, as they were the swap conditions in 2005 and 2010, with an exorbitant Haircut, with many new bonds, with only Discount bonds above $50000, GDP Warrants etc., and with maturities in the eternity. Such “shares like” financial constructs are inacceptable.

A swap from the defaulted old bonds to new bonds is unacceptable also for tax reasons. In Germany, for example, if you accepted a swap, then you would have to pay for the new bonds 30% extra tax…

Following simple conditions might be acceptable for the Holdouts on the basis of the old bonds.(Without swapping from old to new bonds, also because of tax reason)

- at the latest, on 01/01/2015 (end of RUFO clause) Argentina should repay in CASH 100% of the nominal value of the defaulted bonds, which became due before 2015.

- For the accrued interest between 2002-2015 Argentina should emit new bonds with 50% discount, and with a maturity of 5 years.

Mar 18, 2014 1:08am EDT  --  Report as abuse
Errata wrote:
Argentina could be such a wonderful place, one abounding with culture and style and massive productivity, were it not for its hopelessly incurable attempts to government itself in the absence of responsible adult supervision.

Mar 18, 2014 11:51am EDT  --  Report as abuse
GermanHoldout wrote:
Argentina’s rating of Caa1 by Moody (meaning -> substantial risks) is wrong.
The rating of Argentina should be bei Moody’s -> “C” (default of payment) and not Caa1 (substantial risk)

Mar 18, 2014 12:16pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.