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Argentina’s Rating Cut to B- by S&P on U.S. Court Ruling

By Camila Russo
October 30, 2012 8:01 PM EDT
Stacks of 100 Argentine peso notes are displayed for a photograph in Buenos Aires. The U.S. Court of Appeals said Oct. 26 that Argentina can’t make payments on restructured sovereign debt while refusing to pay holders of its defaulted notes because doing so would discriminate against bondholders.
Photographer: Diego Giudice/Bloomberg
Stacks of 100 Argentine peso notes are displayed for a photograph in Buenos Aires. The U.S. Court of Appeals said Oct. 26 that Argentina can’t make payments on restructured sovereign debt while refusing to pay holders of its defaulted notes because doing so would discriminate against bondholders.

Argentina’s credit rating was cut one level by Standard & Poor’s, which cited a U.S. court ruling that prevents the country from honoring its debt without also paying holders of its defaulted bonds.

S&P lowered the country’s rating to B-, six levels below investment grade and in line with that of Jamaica, Pakistan and Belarus, from B, according to an e-mailed statement today.

“The downgrade of Argentina’s unsolicited rating reflects our opinion that the government may face increasing risks in the management of its debt after the U.S. appeals court ruling,” S&P said in the statement. “The decision may effectively increase Argentina’s liabilities and the government’s debt service.”

The U.S. Court of Appeals said Oct. 26 that Argentina can’t make payments on restructured sovereign debt while refusing to pay holders of its defaulted notes because doing so would discriminate against bondholders. The decision may help creditors including hedge fund Elliott Management Corp. collect $1.4 billion on defaulted debt. The perceived risk Argentina will renege on creditors is now the highest of any government in the world on speculation the nation will opt to cease all dollar debt payments rather than settle with the holdouts.

The cost to insure Argentine debt against default soared as much as 576 basis points, or 5.76 percentage points, to 1,534 basis points after the ruling. It fell 37 basis points today to 1,496. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Yield Spread

The extra yield investors demand to own Argentine government dollar debt instead of U.S. Treasuries surged 173 basis points to 1,024 basis points since the decision, according to JPMorgan Chase & Co.

About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to 1974.

Elliott, with $1.6 billion in claims stemming from Argentina’s record $95 billion default in 2001, rejected offers to swap the notes for 30 cents on the dollar and wants the nation to pay in full.

Fitch Ratings also cut Argentina’s credit outlook to negative today. Argentina’s B rating on its long- and short-term foreign currency debt was placed on credit-watch negative, according to a statement.

The action “reflects increased uncertainty about Argentina’s ability to service its international securities issued under New York Law on a timely basis using the U.S. financial system following the recent U.S. Appeals court ruling,” Fitch analysts Lucila Broide and Santiago Mosquera wrote.

To contact the reporter on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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