Even by Argentina standards, August was a particularly dire month.
Markets have tumbled almost without stop after opposition leader Alberto Fernandez routed President Mauricio Macri, a market favorite, in an Aug. 11 primary vote, seen as a dry run for the Oct. 27 election. The peso is down more than 21%, by far the worst in emerging markets, and bonds have yet to find a floor, with notes due 2021 down almost 50% this month and yields of 67%.
The crisis came to a head Wednesday when the administration announced it would postpone $7 billion of payments on short-term local notes held by institutional investors this year and seek the “voluntary reprofiling” of $50 billion of longer-term debt. It will also start talks to delay payments on $44 billion it has received from the IMF.
The announcement prompted S&P Global Ratings to cut the South American nation’s credit rating to “selective default” on Thursday. Still, S&P said it would lift the rating back up to CCC on Friday since the new terms for the short-term debt came into effect immediately.
Bonds extended their decline Friday, though drops were more muted than previous days, probably since investors are already pricing in an over 90% chance of default in the next five years.
“On the bright side, some welcome efforts to lower the country’s liquidity constraints,” said Sebastian Barbe, the Paris-based head of emerging-market strategy at Credit Agricole. “However, on the dark side, some other investors mention that this would be only a temporary and partial fix, and that, given Argentina’s challenged solvency, the risk could be another default in the future. We remain very cautious on Argentina and the peso.”
The upset in the primary election had already led two of the three biggest ratings companies to downgrade Argentina. On Aug. 16 Fitch cut the country’s long-term issuer rating by three notches to CCC from B, while S&P lowered the country’s sovereign rating to B- from B and slapped a negative outlook on it.
IMF officials who were visiting Argentina at the time of the announcement said they are analyzing the measures.
“Staff understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves,” the lender said in a statement.
The fund was expected to disburse another $5.3 billion in the next few months from a record $56 billion agreement, though that’s far from certain given the current crisis.
Without the loan disbursement and cut off from global money markets, the country was facing a serious financing challenge. Morgan Stanley estimated Argentina needed $12.9 billion for repayments on dollar-denominated Treasury bills and bonds in the last four months of the year. Many of those payments have now been pushed back to next year.
Meanwhile, the country’s dollar buffers are draining away. Foreign exchange reserves fell to $56 billion Thursday, and Capital Economics estimates that net reserves -- which exclude deposits at commercial banks -- were already at $19 billion earlier in the week, down from $30 billion in mid-April. That only covered a quarter of Argentina’s gross external financing needs of $100 billion, which includes debt maturing over the next year plus the current account deficit.