By Daniel Bases
NEW YORK Nov 27 Fitch Ratings on Tuesday
slashed Argentina's sovereign credit rating to CC from B, a
five-step cut reflecting its view of a "probable" default after
a U.S. judge ordered payment to holdout investors from its
historic 2002 default.
"The increased probability that Argentina will not service
its restructured debt securities issued under New York law on a
timely basis" stems from U.S. District Court Judge Thomas
Griesa's order for Argentina to pay holdout investors concurrent
to bondholders who participated in two prior debt
restructurings, the rating agency said.
Fearing Argentina will disobey his order, Griesa wants $1.33
billion deposited in a U.S. escrow account by Dec. 15 to ensure
payment if all appeals trying to overturn or block his decisions
The "holdout" investors are suing to recover the full value
of bonds that Argentina stopped paying in 2002, setting up a
battle with the country's left-leaning government, which brands
them as "vulture funds" and has refused to pay them.
Fitch put a negative outlook on the credit which is two
steps away from outright default.
Argentina has vowed not to pay the holdout investors, led by
Elliott Management's NML Capital Ltd and Aurelius Capital
Management, prompting Griesa to order the payment be made before
the 2nd Circuit rules on his decision.
Fitch highlighted Argentina's 2005 "Lock Law" which
prohibits "re-opening the exchange or from conducting any type
of settlement with holdouts without prior authorization from
Congress" as a likely reason that payment will not be made.
If no payment is made a technical default would ensue, with
uncertainty remaining over treatment of credit default swap
contracts, which have surged in prices as investors scramble for
protection from a default or restructuring.
"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," Fitch said in its statement.
The firm also highlighted concerns that Argentina's
government is taking an increasingly interventionist role in the
economy and the concentration of power in the executive branch
"undermine policy predictability and contributes to a tense and
polarized political climate in Argentina."
Argentina is rated B-minus with a negative outlook by
Standard & Poor's and an equally speculative B3 by Moody's
Investors Service, which also has the credit with a negative
Last week Argentina had its first general strike since
President Cristina Fernandez took office five years ago.
Opposition trade unions protested her economic policies by
bringing public transportation and grain exports to a halt.
"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,"