| BUENOS AIRES
BUENOS AIRES Argentina's dismal credit ratings might get a boost if U.S. courts rule in the country's favor in a long-running dispute with creditors over a 2002 default, but rating agency analysts say weak economic conditions could hinder any positive outcome.
Argentina has not tapped global credit markets since it defaulted on roughly $100 billion in sovereign debt 11 years ago, mainly because of lawsuits by "holdout" creditors who rejected debt swaps and sought full repayment despite acceptance by nearly 93 percent of other bondholders.
"Nobody knows what's going to happen with the court case because this is uncharted territory," Standard & Poor's credit analyst Joydeep Mukherji told the Reuters Latin America Investment Summit this week.
The credit ratings on Latin America's No. 3 economy are deep in junk bond territory. Moody's Investors Service and Fitch Ratings cut some of Argentina's ratings further after two U.S. courts ruled against the country late last year.
One judge ordered Argentina to pay holdouts the full $1.33 billion owed them the next time it serviced restructured debt. Argentina appealed, and a ruling by the 2nd U.S. Circuit Court of Appeals is expected in the coming weeks.
Investors are following the case closely because Argentina appears willing to enter into technical default in order to avoid paying the holdouts any more than what other creditors received in the 2005 and 2010 restructurings.
S&P has kept Argentina's sovereign credit rating at B-minus with a negative outlook, despite the legal risks.
"To go one step further to the C category, for our own debt criteria, that would be making a very strong statement saying we think they're going to lose the court case and we think that there's no escape valve," Mukherji said. "We feel that we've signaled enough to the market what the dangers are and with a B-minus negative we're saying, we're right at the edge here."
If the court case goes against Argentina, that could push the rating into either selective default or default.
If Argentina ends up winning a favorable ruling, however, the S&P analyst said he still could not guarantee the agency would improve the negative rating outlook since abrupt policy changes make the country such a "fast-moving story."
Moody's senior credit officer, Mauro Leos - speaking at the summit held in Reuters' New York office - had a similar perspective.
In March, Moody's cut the credit rating on Argentine sovereign debt governed by foreign law to Caa1, reflecting the risk that a final court ruling would result in some delay or loss to holders of restructured foreign-law debt. It affirmed Argentina's B3 issuer rating, which applies to bonds issued under local law.
Leos said a court ruling that favors Argentina and averts any payment problems on the restructured debt would likely put the rating on foreign-law bonds back to B3.
"That would be a purely technical decision. What is more important is the fundamentals," Leos said, citing concerns over increased state intervention and economic distortions.
Argentine officials often assail rating agencies and the economy minister has accused them of issuing "terrorist reports" to scare investors and benefit speculators.
Argentina's economy has slowed sharply in the past year after booming during most of the last decade. Most economists blame soft global demand, high inflation and the negative impact of currency and trade controls on investment.
Fitch slashed Argentina's long-term foreign currency debt rating to CC from B in November, reflecting its view that a default was likely due to the U.S. court rulings. It also noted that a missed payment on the New York-law bonds could trigger a "cross default" on all foreign-law restructured debt.
At the same time, Fitch cut the local currency rating to B-minus from B and placed it on a negative outlook.
Sovereign analyst Shelly Shetty said Fitch would raise its foreign currency rating if Argentina won the court case, but it would also take deteriorating economic conditions into account.
With no access to capital markets and sharply slowing economic growth, Argentina faces more fiscal pressure. But if it leans more on the central bank for financing, that will worsen inflation, which is already seen topping 20 percent a year.
"There's not only a very difficult and challenging economic environment, but also a very feeble economic recovery," Shetty told the summit on Friday, saying nonetheless Argentina still has enough international reserves to keep paying its debts.
(Editing by Peter Cooney and Diane Craft)