Argentina's Chance of Default Soars

Credit rating agency Fitch believes that the financial and political unrest in Argentina has substantially increased the chance it will default on its sovereign debt. That could deeply trouble the world’s credit markets, which are already fragile.

Fitch downgraded the rating to CCC from B, saying:

The downgrade of Argentina’s ratings reflects elevated policy uncertainty following the Aug. 11 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. The primary election results point to heightened risks of policy discontinuity following the October 2019 general elections. This has prompted a collapse in market sentiment, including a sharp depreciation in the peso and widening of sovereign debt spreads, which poses a major setback to macroeconomic stabilization efforts and sovereign financing conditions. These adverse developments could impair the sovereign’s liquidity position in the near term and amplify debt sustainability risks.

Argentina defaulted on its debt as recently as 2014, as well as in 2001. Brookings explained these events:

For the second time in 13 years, Argentina defaulted last week, after not being able to reach an agreement with holdout investors which would have allowed debt-restructured creditors to be paid using funds already deposited by the Argentinean government in New York. This latest default is very different from the one in 2001 which was marked by a collapsing economy, unsustainable debt (about 150 percent of GDP) and, more importantly, by the inability of the government to keep making debt payments. … this new de facto default is the result of a U.S. court ruling in favor of the holdout investors’ claim to be paid in full (i.e., without any “haircut”) and the inability of the Argentinean government to successfully negotiate with them.

While it is uncertain what institutions hold this debt, there is also the issue of leveraged derivatives, which amplify the financial fallout. A default could cause real damage to the world’s financial markets.