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The announcement did not improve the qualification
La Nacion
September 07, 2008

Standard & Poor s, Moody s and Fitch Ratings will not change the country's risk qualification because of the payment of the debt with the Paris Club

by Rafael Mathus Ruiz

It wasn't enough. The announcement of the write-off of the debt with the Paris Club, an initiative which, among others, sought to revive its standing with investors, traders and analysis, who collectively make up what is known as the market, not only did not get its full blessing, but ended up as a reminder of how much the Government has not yet done or corrected.

The main risk qualifiers on the planet, who more recently have been harshly criticized for their role in the brewing of the global financial crisis, were no exception. Although they recognized that the measure is positive and helps to improve the country's image, they each confirmed that it does not affect its qualification. The arguments are fairly similar: the payment does not solve the underlying problems nor does it dispel doubts about the future. Between the lines, they made it clear that a will to pay is not the same as the capacity to pay.

The sovereign analyst at Fitch for Argentina, Erich Erispe, said that the initiative serves "as a sign to the markets that it is seeking to show a will to pay, but it is not tackling the structural problems in the economy." "It remains to be seen whether this decision is part of a series of measures aimed at adjusting economic policy as a whole," said Erispe. This is a view shared by his colleagues who are waiting for more substantial signs concerning the fight against inflation or the greater care on the fiscal front to evaluate improvements in the debt qualification.

Even so, Erispe said that in theory, the payment "should facilitate" access to external financing for companies and the Government's public investment projects. "The underlying issues which have meant that Argentina has presented a higher level of country risk and an unfavorable climate for foreign investment continue to be untreated either credibly or coherently."

Which are these issues? "We believe that the excessive State intervention in the economy through Price controls, export quotas and tariffs, added to the doubts over inflation figures will continue to weigh heavily in the decisions taken by investors, rather than this gesture towards the Paris Club," answered Erispe.

"The operation announced does not solve the problems of accelerated fiscal spending, which depends on political and external variables, the erosion of the trade balance, or inflation and expectations of high inflation rates," he finished.

Until the Government does not close a deal with the bondholders who rejected the debt swap, known as holdouts, Fitch will maintain the qualification of the long-term debt in foreign currency as RD, or restricted default. For local currency papers, Fitch is holding level "!B" qualifications, in spite of the years of growth and twin surpluses "given the structural weaknesses of the economy and doubts over the sustainability of the economic model," said Erispe.

For Fitch, the government should carry out "important adjustments" in economic policy and show consistency in its decisions. Erispe did not leave out the manipulation of inflation statistics and the intervention of the INDEC. "There is an urgent need to recover the credibility in official figures and a credible policy to manage inflationary pressure."

The analyst of the qualifier Standard & Poor's, Sebasti n Briozzo, agreed that the payment to the Paris Club is positive as it solves "a pending issue". The decision will help the international insertion of the country and unblock foreign investments, he said, although it will only help "marginally" towards access to financing.

"In fact in 2006, there was access to markets; we raised our rating and there was no agreement with the holdouts and the debt to the Paris Club continued to be unpaid," remembered Briozzo. For this reason he said that an eventual negotiation with that group of creditors is secondary and what is fundamental are Government policies.

"Payment of the Paris Club is not a factor that will lead to a review of the qualification. It could be modified if there were clearer signals over which are the policies to be applied to correct the macroeconomic imbalances which are starting to be seen, of which the most obvious is inflation. There is room for maneuver and that creates an opportunity. It remains to be seen whether it will be taken advantage of," finished Briozzo.

"We are not expecting an immediate failure to fulfill the payment of the debt, because if that were the case, the qualification would be even worse than it is", said Briozzo. A few weeks ago, Standard & Poor's dropped the rating for Argentine debt from "B+" to "B", a decision which prompted harsh criticism from president Cristina Kirchner.

"There is a deterioration in credit quality, but we still have the highest rating for the country, as there is room for maneuver, but if corrective measure are not taken, the risks are going to be ever greater," finalized Briozzo.

Already on the day of the announcement, the sovereign risk analyst for Argentina from Moody's Gabriel Torres had pointed out that the decision to pay off the debt with the Paris Club was a "moderately positive" initiative. Torres added that although the decision solved a problem which had been pending for several years, it would not have any effect on the qualification which Moody's assigned Argentina. "It will have no impact on the qualification but we will look out for future political decisions," he said.

Moody's has been over the last few years the most exigent agency with the country when it came to bestowing improvements in its debt rating. It did not drop it after the cut that Standard & Poor's carried out, but it did lower the outlook for its "B3" qualification (one of the lowest on the scale) from positive to stable.

The current rating reflects completely a poor capacity to pay," said the agency in a press release issued two weeks ago from London. Once again, the will to pay is not synonymous with the capacity to pay.