PARIS (MNI) – Fitch’s rating agency has downgraded Argentina’s
sovereign debt by five notches, pushing it eight notchs below investment
grade level.

The agency said it was “probable” Argentina would default on its
debt. It kept the country on negative outlook. Below is the text of
Fitch’s statement:

“Fitch Ratings has downgraded Argentina’s long-term foreign
currency (FC) Issuer Default Rating (IDR) to ‘CC’ from ‘B’ and the
short-term IDR to ‘C’ from ‘B’. All securities issued under
international law have been downgraded to ‘CC’ while both FC and local
currency (LC) denominated securities issued under Argentine Law have
been downgraded to ‘B-‘. Fitch has also downgraded Argentina’s LC IDR to
‘B-‘ from ‘B'; the Outlook on the LC IDR is Negative. The Country
Ceiling has been downgraded to ‘B-‘ from ‘B’.

The downgrade of the long-term foreign currency IDR reflects
Fitch’s view that a default by Argentina is probable. The increased
probability that Argentina will not service its restructured debt
securities issued under New York law on a timely basis reflects US
District Judge Griesa’s decision on Nov. 21 to remove the stay order on
the ruling that Argentina must pay US$1.33 billion to holdout investors
concurrent with or prior to its payments due to holders of the 2005 and
2010 restructured debt. The stay order will be removed with effect from
Dec. 15.

Argentina is due to pay approximately USD3 billion of GDP-linked
warrants on Dec. 15, 2012. A missed payment on the GDP-linked warrants
could trigger a cross default on all exchanged debt securities issued
under international law. Subsequently, a missed coupon payment of any
other external securities would also trigger a cross default on all
exchanged bonds issued under international law.

Following the US Court of Appeals decision to uphold Judge Griesa’s
ruling that Argentina breached the ‘Equal Treatment Provision’ of the
original New York-based law bonds that defaulted in 2001, the court
remanded the case back to Griesa for specific clarifications on how the
ratable payment formula would work and to which third parties the
injunctions should apply. On Nov. 21, Judge Griesa explained that the
clarifications requested of his court by the superior court ‘did not
affect the basic ruling that there can be no payments by Argentina to
exchange bondholders without an appropriate payment to plaintiffs’.

In light of Argentina’s official statements that the government
will not honor the court’s decision and the country’s 2005 ‘Lock Law’
which prohibits the government from re-opening the exchange or from
conducting any type of settlement with holdouts without prior
authorization from Congress, Judge Griesa decided that the stay should
be lifted ‘at the earliest possible time’ so there is more assurance
against a possible evasion. The Dec. 15 date ‘gives some reasonable time
to arrange mechanics’ and allow the Appeals Court to consider the merits
of the circuit court’s clarifications on the two issues at stake.

According to the ruling, the payment due to the plaintiffs should
be made into an escrow account by Dec. 15 with the provision that it
could be adjusted by any modifications that the Court of Appeals may
impose subsequently.

The Argentine government is in the process of challenging Judge
Griesa’s decision in the U.S. Appeals Court and has also announced its
intention to take the case to the U.S. Supreme Court if needed, although
it is not clear if the Supreme Court will agree to preside on the
matter.

Fitch will continue to monitor how the case evolves and the
Argentine government’s response in the coming weeks. A missed payment on
exchanged debt securities issued under NY law (including the GDP-linked
warrants), which remains uncured within the stipulated 30 days grace
period, would constitute a default event. In such a scenario, on expiry
of the grace period Fitch would move Argentina’s FC IDR to ‘RD’
(Restricted Default) and the bond ratings of the affected securities to
‘D’ (Default). On the other hand, a positive resolution, under which the
Argentine authorities decided to pay the plaintiffs in line with the
court ruling, and which therefore allowed the sovereign to continue
servicing its NY-law external debt without interruption after the
Appeals Court’s final ruling, would be reflective of its willingness to
pay and lead to a positive rating action on the FC IDR.

Fitch’s downgrade of Argentina’s local currency IDR reflects the
sustained deterioration of its credit fundamentals. The uncertainty
related to the impact of the U.S. Court ruling is likely to further
damage confidence and intensify political and social tensions in the
country and undermine growth prospects.

Argentina’s economy has decelerated sharply in 2012 owing to the
increased state intervention. This has been highlighted by the
progressive tightening of capital controls, the nationalization of YPF
and the inability of certain provinces to access USD to repay their
dollar-denominated debt under local law. While the authorities have been
able to stabilize international reserves by progressively tightening
capital controls, this has come at the expense of increased economic
distortions. The sustainability of this strategy is also vulnerable to
international commodity prices, especially soy.

The concentration of power in the executive continues to undermine
policy predictability and contributes to a tense and polarized political
climate in Argentina. The recent massive protests indicate a general
public dissatisfaction with issues ranging from high inflation,
stringent FX controls, weakening infrastructure and corruption
allegations. The authorities’ disregard for popular protest and their
rhetoric suggests that interventionist policies that lead to further
concentration of power and increase economic distortions are likely to
intensify. As a consequence, further deterioration in Argentina’s policy
framework is possible, which could adversely impact the country’s medium
term growth prospects.

The steady attempts by Argentine authorities to ‘Pesofy’ the
economy, the recent intervention in the insurance sector to redirect 15%
of their investments to real-economy projects and the recently approved
financial system reform are all indications of the trend towards further
financial repression or interventionist policies.

Sustained economic weakness that heightens fiscal pressures, which
in the context of limited financing flexibility could lead to
significant erosion of international reserves and greater monetization
of the fiscal deficit with adverse repercussions for inflation, would
increase downward pressure on the rating. A material escalation of
inflation from the already high levels could undermine Argentina’s
fragile equilibrium as depreciation pressures would mount due to erosion
of competitiveness.

Alternatively, improvement in the overall policy stance that leads
to sustainable growth and greater financing flexibility would stabilize
the rating. Improvement in the transparency of official data and
normalization of relations with creditors and multilaterals would also
buttress confidence.”

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