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What I Learned – Argentina hit by Fitch downgrade to ‘CCC’ after shock vote

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FILE PHOTO: A homeless person sleeps outside a shop with a graffiti on its windows that reads “we are leaving”, one day after a national blackout, in Buenos Aires, Argentina June 17, 2019. REUTERS/Agustin Marcarian

BUENOS AIRES (Reuters) – Ratings agency Fitch on Friday downgraded Argentina’s sovereign debt rating from ‘B’ to ‘CCC,’ flagging an increased likelihood of a default in the wake of a shock primary election result that plunged the country into its latest economic crisis.

Argentine markets were in free-fall for most of the week after Sunday’s vote when center-left presidential candidate Alberto Fernandez trounced center-right President Mauricio Macri. The scale of Fernandez’s victory suggested he could win the October ballot in the first round, potentially putting an end to free-market economic reforms and an IMF-backed austerity plan.

The Fitch downgrade brings to an end a tough week in which the peso lost nearly 20% of its value, forcing the central bank to eat into its reserves with dollar auctions. Fitch said it expected Argentina’s economy to contract 2.5% in 2019, down from a previous forecast of 1.7%. Fitch added that it saw government debt rising to around 95% of gross domestic product in 2019.

“The downgrade of Argentina’s ratings reflects elevated policy uncertainty following the primary elections, a severe tightening of financing conditions, and an expected deterioration in the macroeconomic environment that increase the likelihood of a sovereign default or restructuring of some kind,” Fitch said.

Alejo Czerwonko, emerging markets strategist at UBS Global Wealth Management’s Chief Investment Office, said Fitch’s downgrade was not going to substantially change many people’s minds about the solidity of Argentine debt.

“Argentina was already rated deep into junk territory and this is pushing the rating a bit deeper, but it reveals little new information to investors,” he said. “This will lead (other) ratings agencies to reassess the rating.”

Fitch also said it expects growth to be flat in 2020, while also cautioning there was likely to be plenty of uncertainty “given lack of clarity around key economic policies post-election.”

The ratings agency said the chances of Fernandez winning the election had grown, raising doubts about the future of Macri’s IMF-backed austerity plan. The fact that Fernandez’s running mate is leftist former President Cristina Fernandez de Kirchner, a longtime skeptic of the IMF program, only heightened those doubts, Fitch said.

Reporting by Gabriel Stargardter; Additional reporting by Rodrigo Campo in New York; Editing by Marguerita Choy and Tom Brown

Our Standards:The Thomson Reuters Trust Principles.


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