Argentina Inches Closer to Sovereign Default
(7 June 2023 – Argentina) Argentina’s fiscal policy weakness is exacerbating economic vulnerabilities and undermining vital repayment capacity as a severe drought and political election uncertainty compound hyperinflation and almost insurmountable economic challenges for the South American country in 2023.
While Fitch Ratings did not deem Argentina’s recent sovereign debt swaps and buybacks to be default events in Q1 2023, sovereign repayment capacity is under increasing strain as reflected in Fitch’s downgrade of Argentina’s foreign and local currency ratings.
Annual inflation stands at close to 125 percent and according to the Institute of International Finance (IIF), the central bank’s net reserves turned negative in Q2 2023. There is still a US$11 billion external financing gap for 2023 and Argentine Banks are increasingly aware of deteriorating credit risk yet cannot source a suitable amount of alternative assets.
“Argentina’s economy was already weak before a serious drought hit. Now it is broke, and the question in Buenos Aires isn’t whether finance minister Sergio Massa can muddle through to the presidential election at the end of October, it is whether he can make it to the primaries in August before a full-blown financial crisis” stated Euromoney Magazine Editor, Rob Dwyer.
“Banks are very well capitalized and very well provisioned because they have been going through a soft deleveraging process, they don’t lend any more in real terms. But at the same time, they have increasingly exposed themselves to the government as they have to buy ever more securities to finance the fiscal gap” stated S&P Global Latin America FIs Analyst, Alejandro Duran Carrete.
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