MercoPress. South Atlantic News Agency

Fitch says default on Argentine bonds in foreign currency likely

The scope of Minister Toto Caputo's plan is still unclear, Fitch stressed

The credit rating agency Fitch outlined Wednesday the possible consequences of Argentina's latest measures, which would aggravate the uncertainty about the South American country's reserves, particularly after some of its gold was shipped abroad, in addition to other financial gambits that would allow for the creation of banking pesos that would jeopardize a return to “global capital markets.”

Fitch rating Argentina with a CC showed that “a restructuring or default of some kind on the bonds” in foreign currency was likely despite President Javier Milei assuring that his Government would be honoring every upcoming maturity “no matter what,” it was explained. The agency also recalled that foreign currency bond payments in 2025 will amount to US$ 9 billion in 2025 from US$ 4 billion this year while questioning the 2% monthly crawling peg as Argentina's net reserves are believed to be some US$ 6 billion in the red.

Fitch argued that Argentine authorities intend to limit the supply of pesos, which would, in turn, bring on an additional inflation reduction resulting in better conditions for the lifting of the so-called stocks on foreign currency exchange. “However, the scope of this plan is unclear,” Fitch Ratings warned. “By assuming [Argentine Central Bank] BCRA debt, the Treasury will accumulate a new stock of short-term debt, which could be a source of potential demand for dollars in a confidence shock. The BCRA also retains the right to buy LeFi [bonds], leaving an open avenue for peso creation.”

In Fitch's view, a change from negative to positive actual interest rates could further increase internal debt. Reducing it would demand an even larger fiscal surplus, which could slow down any economic recovery.

“The authorities are seeking a repurchase agreement with foreign banks to honor these payments. But doing so on a sustained basis, without restructuring or other relief, will require accumulating reserves and regaining access to capital markets. The outlook for both has become even more uncertain following recent policy announcements,” Fitch said.

The Fitch report signed by analyst Todd Martínez also expressed some doubts as to the chances of success of Economy Minister Luis Toto Caputo's plan, which includes further selling reserves to keep the US dollar from soaring. The study insisted that the monthly 2% variation in the exchange rate widely lagged inflation, thus neutralizing the positive effects “of last December's devaluation.”

In addition, the Government playing a role in the exchange rate contravenes IMF recommendations, “which darkens the outlook for new financing,” Fitch stressed.

Caputo has predicted this week that there will be zero inflation or deflation before year-end, despite recent hikes in the prices of food and other basic items.

In this scenario, the “blue” (a euphemism for “black market”) dollar traded at AR$ 1,425 / 1,455 (buy/sale) Wednesday after the BCRA's regarding a relaxation in currency exchange policies. With the new figures, the gap between the “blue” and the official dollar stood at 56.6%, it was reported in Buenos Aires. It represented a slight improvement from Jul 12's 62%.

The BCRA announced it was shortening the terms for companies accessing the official exchange market to buy dollars for the payment of imports, in addition to increasing the amount that service exporters are not compelled to settle in the Argentine market. The BCRA also allowed “people who had received some assistance from the State during the pandemic or who benefit from subsidies to public services consumption may carry out foreign exchange operations through securities in foreign currency.”