September 19, 2019 / 5:16 PM / a month ago

UPDATE 1-Argentina bondholders face write downs - Fitch, Moody's

(Adds Moody’s report)

By Tom Arnold and Adam Jourdan

LONDON/BUENOS AIRES, Sept 19 (Reuters) - Fitch Ratings expects holders of Argentina dollar bonds to have to write off part of their investments under the country’s sovereign debt restructuring plan, one of the agency’s analysts said on Thursday.

The Argentine government last month announced plans to extend the maturities on about $100 billion in debt as it strives to stem financial meltdown in the wake of the shock primary election defeat for business-friendly President Mauricio Macri last month.

Fitch thinks the move will involve a write down, or haircut, on local and dollar debt, as the government debt - running at around 90% of gross domestic product - is not sustainable, said Charles Seville, senior director at Fitch.

“One of the issues Argentina has had is its refinancing needs have been very high on the domestic side so the debt got shorter and shorter term and became harder to refinance at long maturities,” he told Reuters. “That will continue to be a vulnerability for Argentina.”

Fitch didn’t have an estimate on the scale of a haircut, but in a report published on Wednesday Moody’s Investors Service said it expected investors would to have to take a hit of between 10% and 20%. Moody’s added that losses to investors might ultimately be greater, which would lead to it downgrading Argentina’s current Caa2 sovereign rating further.

After downgrading Argentine sovereign debt to “restricted default” after the government’s decision to extend some debt maturities, Fitch then upgraded the rating to “CC” after the country’s payment of short-term debt instruments on Aug. 30.

The winner of October’s election, expected to be challenger Alberto Fernandez, faces a big fiscal consolidation that might be higher than the IMF’s estimate of 3 or 4 percentage points of GDP, said Seville.

“That requires reforms to social security and other areas that haven’t been touched. That’s one of the reasons we think bondholders will have to make a contribution,” he said.

“The IMF, having stayed fairly quiet until now, are clearly talking to the administration and the potential incoming administration. Having until now signed off on debt sustainability (the IMF) may well decide that if they’re going to stay involved, bondholders also need to provide some financing.”

The IMF agreed a $57 billion line of credit with Argentina last year and needs to make a decision on releasing the latest tranche of those funds. The disbursement, initially set for this month, was thrown into disarray by Macri’s primary defeat, with the government imposing capital controls to try to stem a crash in the peso.

“If the IMF were to withhold the next $5.4 billion disbursement, due on or after 15 September, we anticipate that a severe market reaction would likely follow, further raising the government’s debt load and lowering its debt affordability,” Moody’s said in its report. (Editing by Pravin Char and Mark Potter)

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