Political and economic uproar in Argentina sent already-sliding sovereign ratings further down a descending spiral last week, though Standard and Poor's seemed to take the most heat from market participants as it has been the only one to additionally downgrade 13 structured finance transactions in the region thus far.
Moody's Investors Service changed Argentina's sovereign rating to B2 from B1, Fitch downgraded it to single B+ from BB- and S&P changed the rating to single B+ from BB-. The rating changes are a result of the near three-year recession and the heated political turmoil in the country.
S&P announced its sovereign change on Monday of last week, and followed with the downgrade of 13 structured transactions the next day. The opinion in the market was that S&P seems to link the sovereign rating too tightly to the individual transaction ratings. "S&P clings to this notching approach. It's ridiculous," said one industry player.
However, the rating agency argues that while the rating changes were not a direct result of the sovereign rating change, it did play a role. "We have to remember that all structured finance deals coming out of Latin American countries are originated in those countries, so you do have to take sovereign risk into account," said Jose Ramn Tora of S&P. "You can break down the sovereign risk, direct and indirect, into different risks. The higher number of risks mitigated in the deal, the better rating you have. Despite that, originators and asset pools are still in non-investment-grade countries," Tora added. "In Argentina, for example, factors like the new tax on checks, high unemployment, etc. are affecting the originators' and assets' performance. We have to incorporate that into our analysis."
There is often quite a bit of debate among the rating agencies when it comes to rating transactions in general. "There are deals that we've talked to the rating agencies about and which would barely get an investment grade rating from S&P and a high single-A from Moody's, which is insane," said the industry source, though many market participants said it was a result of different approaches. "We are watching the same things, we have different methodologies," said one analyst.
Separately, in a teleconference late last month, S&P said it was refining its rating strategies, and the new strategies were used in the recent Argentine rating actions.
At press time Fitch had not downgraded any of its structured transactions and Moody's said in a statement to ASR, "As of March 29, 2001, Moody's has not announced any rating action in connection with Argentine structured finance transactions."
While the market participant critical of S&P also stated that, "S&P is off the mark and behind the times," Ricardo Hausmann, a professor of economic development at the Kennedy School of Government at Harvard University, made a general comment, "Rating agencies are slow movers. They are reacting to past news. It's been several weeks since the market downgraded Argentina and the rating agencies are simply trying to keep pace with the market. The only thing is that the market is turning now and is upgrading Argentina. So the rating agencies appear to be out of step, but that is their natural state. They are behind the curve. There is ample evidence that the rating agencies are laggers, not leaders."
The country's new administration, led by President Fernando de la Rua, has received repeated attacks from the country and industry experts. "These guys [the new administration] are asleep at the wheel or in any case they must be watching a different movie," said Hausmann. "The fact that the market does not know what the policies of the new administration are, is a source of instability."
After the resignation of three Argentine cabinet members, Domingo Cavallo has returned to his former position as Minister of Economy, where he previously sat for five years beginning in 1991. His return has been well received by the country and market players say that over the last few days, the Argentine situation has improved as a result.
