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 fail.
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 outlook.
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," Fitch said.