Argentine country risk drops below 450 points, hitting 8-year low

Standard & Poors upgraded Argentinas credit rating from CCC+ to B- on Thursday, sparking a wave of euphoria in the local market.  Dollar-denominated sovereign bonds registered sharp gains, and the country risk index plummeted to 444 basis points, reaching its lowest level since May 2018. The local S&P Merval index rose more than 7% in hard currency, while Argentine ADRs climbed as much as 11.5%, led by bank stocks. The upgrade follows a similar rating action by Fitch Ratings in early May and reinforces investors perception of a gradual reduction in Argentinas risk profile. Spurred by this momentum, foreign-currency securities advanced by up to 3.5% on the local market. Dollar-denominated bonds rose as much as 3.3%, led by the Global 2041, followed by the Global 2038 (+2.8%), the Global 2035 (+2.7%), and the Bonar 2041 (+2.7%).  Argentine stocks traded abroad rose by nearly 12%, led by BBVA (+11.5%), Telecom (+11.4%), Grupo Supervielle (+11.3%), and Grupo Financiero Galicia (+9.9%). The S&P Merval index rose 5.68% to 3,336,280.27 points, while in hard currency it climbed 7.3% to 2,241.87 units. Local stocks rose as much as 10%, led by BBVA (+10.2%), Grupo Supervielle (+10.1%), and Grupo Financiero Galicia (+8.6%). The S&P report In its report, S&P explained that the upgrade reflects reduced economic vulnerability, a gradual improvement in external liquidity, and a strengthening of the countrys ability to meet its financial obligations.  The agency highlighted the accumulation of international reserves, the consolidation of fiscal balance, and the various sources of financing that have enabled the government to meet its debt maturities. However, the rating agency warned that the Argentine economy remains vulnerable to potential external shocks and macroeconomic challenges over the next 12 to 18 months. Even so, the agency’s baseline scenario assumes the country can weather these tensions without defaulting or undergoing a forced debt restructuring. Argentine sovereign bonds are currently trading with spreads near 500 basis points, a level we consider high for a country with a B- rating. In the near term, we see room for a compression toward the 400-450 basis point range, said Daniel Chodos, head of research at Dhalmore Capital. A report by Adcap added that the probability of an upgrade by Moodys in the upcoming months remains high.  We expect the Argentine yield curve to converge rapidly toward Ecuadors, especially after a second major rating agency moved the sovereign out of the CCC-rated zone. The table below shows the expected gains under different convergence scenarios, the document said. Originally published in mbito.com