October 10, 2001

S&P slashes Argentina's credit rating

Warns of more reductions if budget is not balanced

Genevieve Wilkinson Reuters NEW YORK - Standard & Poor's yesterday cut Argentina's long-term sovereign credit rating to a level deep within junk bond territory, saying the government faces severe challenges in balancing its budget.

The ratings agency took the move five days before Congressional elections that analysts say could complicate President Fernando De La Rua's task of rebuilding an economy mired in a prolonged recession.

S&P cut Argentina's long-term sovereign credit rating to CCC-plus from B-minus and affirmed its single-C short-term rating. The outlook on both ratings is negative, meaning additional downgrades could follow.

Furthermore, S&P said political opposition to push through additional spending cuts needed to balance the budget in the light of sinking tax revenues makes it likely Argentina will have to restructure its US$132-billion debt load. The downgrade took the shine off yesterday's mini-rally on speculation of a debt exchange. Traders said Argentine bonds fell a full point.

"The downgrade reflects the increasingly severe economic and social challenges Argentina faces in balancing the federal budget," S&P said in a statement. "Low tax revenues for September and the likely need for US$900-million in additional spending cuts highlight the mounting challenges the government faces in implementing its fiscal program."

Low consumer confidence, the severe local credit crunch and the global economic slowdown have contracted Argentina's $285-billion economy. Argentina's stock and bond markets suffered major tremors during the first week of October, prompted by the announcement of dismal tax receipts in September. Tax revenues fell 14% from September, 2000.

The decline, S&P said, is significant and confirms the battered economy is showing no signs of stabilizing.

"Thus, all efforts to balance the budget must continue to focus exclusively on further spending cuts. Growing internal challenges lessen the government's budgetary manoeuvrability. Moreover, given these pressures, Standard & Poor's view is that, regardless of the outcome of the legislative elections of Oct. 14, Argentina is increasingly likely to have to restructure its debt," S&P said.

S&P said the ratings could be lowered again if political, economic and social factors frustrate the government's efforts to keep the fiscal situation under control.

http://www.nationalpost.com/financialpost/worldbusiness/story.html?f=/stories/20011010/728100.html

-- Martin Thompson (mthom1927@aol.com), October 11, 2001