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Fitch, S&P downgrade Argentina debt as default risk grows

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Ratings agencies Fitch and Standard & Poor's downgraded Argentina's sovereign debt rating on Friday, flagging higher chances of a default in the wake of a shock primary election result that plunged the country into its latest economic crisis.

[BUENOS AIRES] Ratings agencies Fitch and Standard & Poor's downgraded Argentina's sovereign debt rating on Friday, flagging higher chances of a default in the wake of a shock primary election result that plunged the country into its latest economic crisis.

Argentine markets were in free-fall for most of the week after Sunday's vote when centre-left presidential candidate Alberto Fernandez trounced centre-right President Mauricio Macri. The scale of Mr Fernandez's victory suggested he could win the October ballot in the first round, potentially putting an end to free-market economic reforms and an IMF-backed (International Monetary Fund) austerity plan.

The downgrades cap a tough week in which the peso lost nearly 20 per cent of its value, forcing the central bank to eat into its reserves with dollar auctions. Fitch downgraded Argentina's sovereign debt rating from 'B' to 'CCC', while S&P lowered its rating to 'B-' from 'B'.

"The downgrade of Argentina's ratings reflects elevated policy uncertainty following the primary elections, a severe tightening of financing conditions, and an expected deterioration in the macroeconomic environment that increase the likelihood of a sovereign default or restructuring of some kind," Fitch said.

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Fitch said it expected Argentina's economy to contract 2.5 per cent in 2019, down from a previous forecast of 1.7 per cent. Fitch added that it saw government debt rising to around 95 per cent of gross domestic product in 2019.

S&P saw 2019 growth falling 2.3 per cent, compared with a prior forecast of a 1.6 per cent decline.

Alejo Czerwonko, emerging markets strategist at UBS Global Wealth Management's Chief Investment Office, said the downgrade was not going to substantially change many people's minds about the solidity of Argentine debt.

"Argentina was already rated deep into junk territory and this is pushing the rating a bit deeper, but it reveals little new information to investors," he said.

While Fitch said it expects growth to be flat in 2020, S&P saw 2020 growth at 0.5 per cent, compared with a prior forecast of 2.2 per cent, highlighting uncertainty over the policies of Mr Fernandez.

Fitch said the chances of Mr Fernandez winning the election had grown, raising doubts about the future of Mr Macri's IMF-backed austerity plan. The fact that Mr Fernandez's running mate is leftist former President Cristina Fernandez de Kirchner, a longtime skeptic of the IMF program, only heightened those doubts, Fitch said.

"We could lower the ratings over the next 12-18 months if economic and financial stresses continue to mount," S&P said, adding it saw "a greater than one-in-three chance of a downgrade over the coming year."

REUTERS