Argentine Debt Rating Cut by S&P Amid Default Concern

By Drew Benson and Lester Pimentel

Oct. 31 (Bloomberg) -- Argentina's debt ratings were cut by Standard & Poor's for the second time since August amid mounting concern the global financial crisis and a tumble in commodity export prices will lead to default.

S&P lowered the South American country's foreign debt rating to B-, six levels below investment grade and in line with countries including Bolivia and Lebanon, from B.

Argentine bonds have plummeted this month, pushing benchmark dollar-denominated yields as high as 30 percent, as the tumble in commodities crimps the country's export receipts and tax revenue. Bond declines deepened last week after President Cristina Fernandez de Kirchner announced plans to nationalize pension funds, a move many investors said is a bid to use the funds' $26 billion to avert the country's second default this decade.

``It's a textbook definition of an economic disaster,'' said Nick Chamie, head of emerging-market research at RBC Capital Markets in Toronto. The S&P move ``confirms what the rest of the market knows -- that Argentina is close to default and that risk is very high.''

Argentina's peso slid as much as 0.9 percent today before rebounding to trade little changed at 3.3865 per dollar at 4:45 p.m. New York time. The peso dropped 7.5 percent in October, the biggest monthly decline since the government abandoned a currency peg in January 2002 after defaulting on $95 billion of bonds.

`Seeking Refuge'

``People are seeking refuge in dollars,'' said Mariano Tavelli, who manages $300 million of assets at Buenos Aires- based brokerage Tavelli y Cia.

The government's 8.28 percent dollar bonds maturing in 2033, which were issued as part of a 2005 debt restructuring of the defaulted bonds, gained today, pushing their yield down 1.62 percentage points to 27.52 percent, according to JPMorgan Chase & Co. The bonds yielded 14.19 percent a month ago and 10.91 percent on June 30.

The yield on Argentina's 5.83 percent inflation-linked peso bonds due in February 2033 fell 60 basis points, or 0.60 percentage point, to 20.13 percent, according to Citigroup Inc.'s local unit. The yield has climbed more than 12 percentage points this year.

``Bond prices have predated the rating agency downgrade -- stuff is trading at pretty distressed levels already,'' said David Bessey, who manages more than $8 billion of emerging- market debt in Newark, New Jersey, for Prudential Financial Inc. ``They are taking some pretty unorthodox measures to try to shore up their balance sheet. Global investors are not comforted by that.''

Financing Needs

Fernandez is trying to cobble together funds to cover financing needs that RBC Capital Markets forecasts will grow to as much as $14 billion next year from $7 billion in 2008.

Argentina hasn't had access to international debt markets since the default and demand for its local bonds has dried up amid concern the government is underreporting inflation.

``Financing flexibility in Argentina is extremely constrained,'' S&P analyst Jane Eddy said in an interview in New York.

U.S. District Judge Thomas Griesa today granted a second bondholder request for a temporary order freezing investments by Argentina's pension funds. The bondholders, who have been trying to recoup their investments since they rejected Argentina's 2005 debt restructuring, said that as many as five private Argentine funds may hold assets in the U.S. The country's private pension funds' regulator, Sergio Chodos, today said Griesa's decision to freeze assets ``has no basis.''

`Diminished Domestic Confidence'

Argentina's congress, which is controlled by Fernandez's coalition, this week began debating legislation to seize the 10 pension funds, a move that Fernandez, 55, says aims to protect pensioners from the rout in global financial markets. She denied the plan is an effort to ``grab the cash.''

The pension takeover plan ``diminished domestic confidence,'' S&P's Eddy said. While the move may provide access to additional financing, ``the downside of the policy outweighs short-term benefit,'' she said.

Commodity prices have sunk 43 percent from a record high reached in July, according to the UBS Bloomberg CMCI Index of 26 raw materials.

Soybeans, wheat, corn and other commodities account for more than half the country's exports, helping spark a five-year economic expansion. Growth will slow to 6 percent this year and 3.3 percent in 2009 after a two-fold increase in government spending fueled an average rate of 8.8 percent in the past three years, according to the median forecast in a Bloomberg survey of economists.

`Perfect Storm'

The economic ``decline is going to be sharp,'' Eddy said.

S&P's cut today puts its rating for Argentina on par with Moody's Investors Service's B3 rating for the country. S&P's outlook for the rating is stable. Eddy said additional fiscal deterioration ``could be a trigger'' for another rating cut.

``There's a perfect storm between economics, politics and fiscal policy,'' Eddy said.

To contact the reporters on this story: Drew Benson in Buenos Aires at Abenson9@bloomberg.net Lester Pimentel in New York at lpimentel1@bloomberg.net;