Argentina Bond Rating Cut by Moody’s on Dollar Reserves Drop

Argentina had its credit rating cut by Moody’s Investors Service Inc., which cited the country’s plunging foreign reserves.

Moody’s said in a statement that it lowered Argentina’s rating one level to Caa1, or seven steps below investment grade, from B3. Argentina is now rated in line with Venezuela, Egypt, Ecuador, Pakistan and Cuba.

In a bid to rebuild reserves that plunged to a seven-year low, President Cristina Fernandez de Kirchner devalued the peso by 19 percent in January, the biggest drop in more than a decade, while the central bank boosted interest rates to ease demand for dollars. Argentina, which relies on reserves to make foreign debt payments, hasn’t sold debt overseas since defaulting on $95 billion in 2001. The country posted its narrowest trade surplus since 2001 in January.

“Their funding options are so limited right now -- basically just reserves,” Gabriel Torres, an analyst at Moody’s, said in a telephone interview from New York. “That’s a problem. There’s going to be pressure to devalue yet again.”

Argentina’s foreign-currency holdings have plunged 34 percent over the past year to $27.4 billion.

Moody’s expects the currency to fall to as low as 12 pesos per dollar by the end of the year from 7.9249.

Court Appeal

The ratings company last downgraded Argentina’s government bonds in 2005. In March 2013, Moody’s cut the rating on Argentine bonds issued under foreign legislation as a result of litigation with holders of defaulted debt. The rating on those securities was downgraded to Caa2 today.

Argentina is appealing U.S. court orders that block the nation from paying holders of restructured bonds unless it pays holders of defaulted debt in full.

Argentina’s foreign bonds have gained 2 percent this month, compared with an average 0.3 percent loss in emerging markets, according to JPMorgan Chase & Co.’s EMBIG Diversified index. The South American country’s bonds yield 8.83 percentage points more than U.S. Treasuries.

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled in 2012 by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Fernandez, seeking to improve relations with international lenders, last month acknowledged consumer prices are rising about three times faster than the government previously reported. Annual inflation is estimated to be 34.9 percent.

“The underlying lack of confidence, lack of investment, and reliance on only one source of funding, that’s still there,” Moody’s Torres said.

To contact the reporters on this story: Daniel Cancel in Buenos Aires at dcancel@bloomberg.net; Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Lester Pimentel, David Papadopoulos

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