WASHINGTON (AFP) - Standard and Poor's cut Argentina's already low-level sovereign debt rating by one notch to CCC+ on Tuesday, after the country lost a key case over bond repayments in New York.
The ratings agency said the decision, which Argentina has appealed to the US Supreme Court, could result in it missing payments on debt that has already been restructured twice after the country's massive default 13 years ago.
"The lawsuit could result in the interruption of payments on bonds currently under New York jurisdiction, or it could prompt Argentina to undertake a debt exchange that we could view as distressed," the ratings agency said.
If either happens, S&P said, it would have to cut its rating again to "selective default", meaning the country has defaulted on payments on some but not all of its debt.
S&P said there is a one-in-three chance of that happening in the next 12 months.
"The outlook is negative, reflecting our view of the increased risks to debt service from these legal proceedings." On Aug 23 a US appeals court ordered Argentina to pay US$1.86 billion to two hedge funds holding its defaulted bonds, quashing an appeal by Buenos Aires against the initial 2012 judgment.
The court endorsed the original decision that Argentina must compensate the funds 100 per cent of the value of defaulted Argentine government bonds they hold, even though the two declined to take part in a restructuring of the debt.
Moreover, the payments had to be made in parallel with any payments made to holders of the restructured bonds, which are all governed by New York laws under the bond contracts.
Argentina has argued that would not be fair to the restructured bondholders, who took huge losses in the 2005 and 2010 restructurings of nearly US$100 billion of defaulted debt.
In addition, Buenos Aires said, being forced to pay 100 per cent of the hedge fund-owned debt would strain its finances.
The order to pay has been put on hold as Argentina has appealed the decision to the Supreme Court. S&P noted that it was not clear when the Supreme Court would make that decision, nor when, if it accepts the case, it would rule, both factor possibly delaying scheduled payments.
"We believe Argentina will strive to remain current on its debt while the judicial process plays out, notwithstanding a decreasing level of international reserves, limited access to funding, and growing macroeconomic imbalances, in particular high inflation and a dual foreign exchange system," S&P said.
Even so, it added, "If the US Supreme Court does not grant the appeal or if it eventually rules against Argentina, Argentina's ability to service its debt from the 2005 and 2010 exchange would be compromised," S&P said.
Seeking to find a way to avoid the New York court order, Buenos Aires said it would try to relocate the jurisdiction on the restructured bonds to Argentina.
That could allow it to make payments on those bond while ignoring the claims of the hedge funds.
But S&P warned against that move.
"A proposal of alternative payment arrangements that, in our view, materially alter the terms of its bond indentures to the detriment of creditors could prompt another downgrade." The case has implications for the massive global market for sovereign debt, allowing the potential claims of holdouts to block bond restructuring deals, like that in Greece.
But the court said that the Argentina case is relatively unique, and that more recent bond contracts make clear via collective action clauses that holdouts would lose their claims.
"Cases like this one are unlikely to occur in the future because Argentina has been a uniquely recalcitrant debtor," it said.