Argentina's latest economic crisis has spurred a string of ratings downgrades and caused prolonged market turmoil, but unlike prior crises, the banking sector should be able to hold up, Gabriel Torres, senior credit officer for sovereigns at Moody's, said.
At a press conference following Moody's annual conference in Buenos Aires, Torres said that while Argentina's latest plans to re-profile debt is tantamount to a default, not all defaults are equal. The rating agency's current Caa2 sovereign debt rating, along with its negative outlook, implies that bondholders could take a roughly 10% to 20% haircut on their investments, far less severe compared to Argentina's sovereign default in 2001.
Still, Moody's current rating on the country is the 18th-lowest on a 21-tier scale, which raises concerns about the country's capacity to honor its debt payments and regain access to markets. Torres said that Moody's will review its negative outlook within the next three to six months, due to the political uncertainty ahead of the October presidential elections.
Gabriel Torres, senior credit officer for sovereigns at |
"If there is one piece of good news in all of this it's that, in contrast with previous crises in Argentina, there isn't a crisis in the banking sector this time," Torres, said. "Dollar deposits have diminished in the financial system, but the banking sector is not in a critical situation."
To be clear, banks are far from protected, and Moody's recently lowered its outlook on Argentina's banking system to negative from stable, saying that "worsening operating conditions ... will continue to affect banks' asset risk profiles, capital and inflation-adjusted earnings."
But as Marcelo De Gruttola, assistant vice president in Moody's financial institutions group, pointed out, the main challenges for the banking sector are currently related to macroeconomic and political factors, rather than specific sector-related issues. While limited funding, a deterioration of liquid assets and rising delinquencies likely will impact banks, their high liquidity levels and loans to exporters have helped to mitigate those funding needs, he said, and banks have shown the solvency to withstand the stressful conditions.
Javier Bolzico, president of Argentina's ADEBA banking association, also highlighted banks' high liquidity, strong levels of solvency and leveraged loan portfolios as signs that the banking sector has not been caught off guard by the latest economic shock. "These three things are a good starting point for the sector to face the current adverse situation," he said.
Whether President Mauricio Macri wins a second term or whether leading challenger Alberto Fernández takes over, the government challenges will continue to revolve around dealing with Argentina's economic crisis, managing its debt restructuring process and reaching a new deal with the International Monetary Fund, experts noted.
Still, it will be difficult to see change in the short term, which will only be visible in the latter half of next year, if the correct policies are implemented, they noted.
"The level of Argentine debt, when compared to other countries, is not that high and does not justify the crisis that the country is going through," said Torres. The reason for Argentina's crisis lies elsewhere: namely in its incapacity to finance itself with its own currency, he said.
"If you look at Brazil, in the 1990s, about 90% of its debt was in dollars. Now, practically all of it is in local currency. They are financing themselves in their own market," he said.
Private debt will be the most difficult for Argentina to restructure, especially that which was issued under international law. Moody's analysts estimate such debt makes up about 69% of Argentina's total. Meanwhile, negative or even low growth, combined with high volatility will make it difficult for Argentina to meet the upcoming dollar payments, estimated at about $17 billion in 2020 and $21 billion in 2021.
Part of unlocking Argentina's debt conundrum will be tied to reaching a new agreement with the IMF. But for that, the fund will demand structural reforms which the next government would do well to consider.
"It is almost impossible for there to be a restructuring without the incoming government having its say about it," Torres explained as one of the reasons for the stalled negotiations between Argentina and the IMF.
Argentina has defaulted on short-term debt and will do so on medium- and long-term debt, but it is the next government that will have to decide what that will look like, Torres said.
"No country in the world pays its debts. ... All countries issue debt and then to pay that debt issue more debt. The important thing is not what you owe, but to have access to the markets. That is the key. And the problem for Argentina is not the amount of its debt but that it does not have access to the markets," he said.
