Buenos Aires — The last peso debt swap proposed by Argentine Economy Minister Sergio Massa was accepted by fewer than 30% of its private creditors, according to estimates of local consulting firms such as Invecq, 1816 and Equilibra. And for S&P Global Ratings, this exchange of securities constituted a “selective default”.
“We consider distressed most of the swaps carried out at such low [sovereign credit] rating levels, and equivalent to a default,” the rating agency states.
Argentina’s new credit setback does not reflect, however, its “immense potential” in economic matters for the coming years. For Lisa Schineller, managing director of sovereign ratings and economist for Latin America at S&P Global Ratings, this does not detract from the fact that the sovereign faces significant challenges in order to avoid a conventional default situation in the short term.
Argentina’s economy has immense potential. It it so well placed in terms of the sources of conventional energy and renewables, lithium and all of the mining sector, as well as its agricultural and fishing industries.
Lisa Schineller, managing director of sovereign ratings and an economist for Latin America at S&P Global Ratings
The following conversation has been edited for length and clarity.
Bloomberg Línea: How relevant is it for your Argentina local currency decisions that more than half of peso-denominated debt is being held by the government itself, through public sector banks and entities?
Lisa Schineller: One of the weaknesses in Argentina’s sovereign credit construct, irrespective of the current dynamics and pronounced vulnerabilities in the triple C category, is that structurally there’s a small peso market. Because of a lack of policy consistency and predictability, generally high levels of inflation –today is also even more so– the peso is not viewed really as a store of value. It’s more transactional. And an outgrowth of that is that there’s a very small peso market. The goal of trying to develop the local capital markets, which certainly this administration had on its agenda, is very hard to do because of the broader policy track record. There’s an important reliance on holdings by the public sector bodies, starting with ANSES and going to the public banks, because there isn’t that appetite and the depth of the market. Then we go to the central bank, and the growth of its [US Treasury] holdings, as it had to step in increasingly as a backstop, bringing in the put options, etcetera, for the debt that was maturing in 2023. The weight on the central bank balance sheet is also because of the overall distress, and there’s question marks there. There’s the outgrowth of the stress and the lack of demand in the private sector as well, the increased vulnerability.
Are you factoring in the the risk of a future administration re-profiling this peso-debt, as happened during the Mauricio Macri administration?
A very quick way to answer that is the fact that we have the triple C-minus rating with a negative outlook. In essence, that is highlighting significant payment vulnerabilities, and that could be in the form of a distressed debt exchange, which we consider these recent transactions to be, a reprofiling, or a “conventional default” of missing an interest payment, or what have you. Any of those things are significant risk over the coming six months, minus some unforeseen positive changes in the external environment. So, I think there’s a pronounced policy uncertainty period at the moment, as we’re going into choosing the candidates and the alliances this month [for the October presidential elections], then the run up to the PASO, and then the elections. You’ve really got challenges on multiple fronts. Social conditions that have weakened, given the macro conditions, inflation over 100%, etc. And all of this with divisions across the political spectrum, within the governing coalition and within the opposition coalition, with a population that is frustrated with the overall macro-environment and standards of living. Argentina has significant economic challenges to manage. There’s a lot of the political fluidity that I’m describing. In the triple C-minus that we had had until we lowered the rating to default, it’s reflecting these important payment vulnerabilities and uncertainty.
How much of a threat does the central bank’s balance sheet represent? Will it be manageable for the next administration?
From the sense of credit worthiness, room for improvement would stem from improving monetary policy credibility and track record. Argentina’s institutional setting, policy predictability for sustainable growth and finances, economic dynamism, external positions, and fiscal and monetary [conditions] are all very weak and leading to a very low rating. We see payments vulnerabilities as pronounced. Setting [central bank] policy to support the peso and reversing course on monetary issuance and the degree by which it finances the government would feed into improved credit worthiness over time. Just to give you a counterfactual point, Barbados was lacking in its local market and increased recourse to central bank financing, leading to multiple downgrades that ultimately led the country into a default.
Another factor to weigh in from the central bank is its net international reserves, which are negative. How much does that weigh into the risk you’re seeing in Argentina, with many raising questions about what will happen with the IMF disbursement this month?
Once again I’ll highlight the triple C-minus foreign currency rating, when we had a triple C-plus range until March. Then there was an operation to buy back certain global bonds. That transaction highlighted questions around timely payment of commercial foreign debt, because of the very low level of international reserves. Of course, they were low, they went up a bit at the end of last year, and then we have the drought this year. But I think the degree of distress that you’re seeing also comes out in the measure two weeks ago, where provinces’ access to the MULC was limited. Never seen that before. So these are symptoms of the degree of distress around the payment of any foreign instrument. I think you’ve seen flexibility with the IMF, given we are in an electoral moment. There has been a lot of pragmatism and patience. But that very extremely low level of international reserves and the external payments coming up, this is all feeds into why we have the triple C-minus negative foreign currency. In general, Argentina’s external condition is also extremely weak, which leads into the need for both the public and the private sectors to borrow foreign currency abroad.
To the untrained eye, there seems to be a mismatch between negative outlooks from credit rating agencies such as yourselves and what we’re seeing in asset prices. Both Argentine dollar-denominated bonds and stocks have been appreciating this year. What do you attribute that mismatch to?
I think it’s a question of bonds trading at very distressed levels and the markets debating a good entry moment. I think it’s because if you take one step back, there is immense potential in the Argentine economy. It is so well-placed in the sense of conventional and renewable energy sources, the lithium, all of the mining sector, plus the agricultural and fishing industries. If one thinks of the geopolitical context, and pulls it into the friendshoring or nearshoring, and want to use those words, even for those kind of strategic goods, there’s immense potential there. Trying to find exposure to that, I think could be what’s going on there. But we’re looking at timely payment of principal and interest in full. This is where we see those important risks in the near term. Subpar growth, macro vulnerabilities on the fiscal, the monetary side, micro, what have you. Before having that long-term potential feed into creditworthiness, from our perspective, we see a high risk of default.