Standard & Poor's Rating Services announced today that it expects to assign its 'B-' foreign and local currency issuer credit ratings to the Republic of Argentina following the financial close of the current debt rescheduling exercise. In addition, Standard & Poor's expects to assign its 'B-' rating to the new debt that is exchanged for defaulted debt. Argentina has been rated 'SD' (selective default) since its debt default in late 2001.
It is Standard & Poor's policy to reset a sovereign credit rating for a government emerging from default at its forward-looking estimate of creditworthiness. Standard & Poor's defines emergence from a sovereign default
(short of resuming payment on the defaulted instrument) as the successful completion of an exchange offer, even if the nonparticipating creditor debt remains unpaid. Standard & Poor's expects to withdraw its issue ratings on the debt that is currently in default upon completion of the debt exchange.
An upgrade of Argentina to 'B-' would result in a similar raising of the ratings on the Republic's Argentine peso-denominated and U.S. dollar-denominated bonds, Bonos del Gobierno Nacional (BODENs), and on the long-term peso-denominated National Government Guaranteed Loans (Prestamos Garantizados), which are all currently rated 'CCC+'. Payment on these bonds has remained current.
Along with the rating upgrade, Standard & Poor's expects to assign a stable outlook. Over the coming years, the credit rating on Argentina will depend largely on the government's underlying fiscal stance as well as its ability to gain access to funding from official creditors. Achieving a high acceptance rate in the current debt exchange should create better relations between the government and its commercial creditors, facilitating its future access to the debt market. An improved relationship with official creditors, including the IMF, could result in rollovers of official and multilateral debt that is maturing in 2005 and 2006 (totaling more than $13 billion in principal alone), substantially easing the government's debt-service burden and increasing its creditworthiness.
After a rescheduling, the ratings on Argentina will continue to be constrained by:
-- A high government debt burden. The government's debt burden may still exceed 70% of GDP after a debt exchange (assuming an acceptance rate of 70%). Although the proposed new sovereign bonds will create only a modest burden on the budget in the coming years, the government will still bear a heavy burden in servicing other market debt that has not been in default as well as obligations to official creditors.
-- Limited fiscal flexibility. The improvement in fiscal performance in 2004 reflects both cyclical and structural features. Tax collections have improved because of high export prices and renewed economic growth that is
boosting employment. Maintaining the current level of tax revenue (as a share of GDP) will prove to be difficult in the coming years as commodity prices weaken and capacity constraints curtail economic growth; this dynamic will necessitate greater spending control to generate adequate primary budget surpluses to meet future debt-service obligations.
-- Limited monetary flexibility. The conduct of monetary policy will be constrained by the legacy of the recent financial crisis, which led to the loss of the central bank's autonomy and damaged the transmission mechanism of
monetary policy and its credibility.
The ratings on Argentina will be supported by:
-- Its higher level of human development, including better health and education, than other similarly rated sovereigns. In addition, Argentina enjoys relatively more developed physical infrastructure and greater technical
and managerial depth. These factors augur well for reasonably good GDP growth prospects post-rescheduling but are balanced by the country's weak legal and regulatory framework and other limitations.