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Moody's: Argentina's rate hikes to drive up funding costs for borrowers

Record-high interest rates in Argentina, along with the country's myriad structural problems, will drive up funding costs for Argentine borrowers and could derail their access to global markets, Moody's said May 14.

Earlier in May, Argentina's central bank hiked its monetary policy rate to a record 40% as it looks to stave off a rapid depreciation of the peso. Aside from the interest hikes, Argentina has vowed to reduce spending and May 8 asked for the help of the International Monetary Fund over a possible bailout.

"While the moves helped calm the market, they reflect serious structural weaknesses, including fiscal and current account deficits, rampant double-digit inflation, a heavy reliance on investor flows and a relatively small financial system," Moody's said.

Specifically, the sudden surge in Argentina's interest rates will lead to increased delinquencies and credit costs for banks, with lending margins narrowing over the next months, the rating agency said, noting that the scenario is a credit negative for lenders.

Smaller banks and automotive captive finance companies will bear the brunt of the rate hikes as these lenders rely more on funding sources that are linked to the rate that closely tracks the rate on short-term debt securities called LEBACs. Meanwhile, larger banks with better access to retail deposits will face less pressure on their margins.

Given that they are usually pegged at fixed rates, consumer loans will fare worse than corporate loans, which generally yield at a variable rate.

Meanwhile, property and casualty insurers will have reduced profitability and capital adequacy while life and annuity insurers will continue to have limited growth amid Argentina's high inflation and a weaker currency. The depreciation in the peso could greatly affect automobile insurers, given that many spare parts are imported, and thus, sensitive to foreign exchange.

As for the sovereign, the peso's slide is a credit negative development given the increase in risk it entails for Argentine assets and the reliance of the country on portfolio flows for funding, Moody's said. The rating agency, however, said that the Argentine government's response "has been multi-faceted and focused on regaining investor confidence."

"Our view on Moody's-rated funds is that their credit quality and liquidity have been affected only minimally over the past two weeks of financial turmoil," the rating agency said. "We expect the funds to have more liquidity in coming weeks and to remain consistent with their current ratings."