Argentina ETF Slides After Fitch Says Default is Probable


Shares of the Global X FTSE Argentina 20 ETF (NYSE:ARGT) are off 1.5 percent today and trading just 4.1 percent above the fund's all-time low after Fitch Ratings slashed its its long-term rating for Argentina to CC from B. That is a downgrade of five notches. The ratings agency lowered its short-term rating on Argentina to C from B. Fitch made the announcement after the close of U.S. markets on Tuesday.

Noteworthy is the fact that a C rating is just one level above default. Earlier this week, Benzinga reported that surging credit default swaps used by traders to protect against an Argentine default indicated the country could be headed to its second sovereign default this century.

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Over the past three years, credit default swaps used to protect against default on Argentine debt traded between 500 and 1,500 basis points, implying a low probability of default. However, those swaps traded as high as 4,000 basis points on Monday before falling back to 3,000 basis points. No matter how one views that, even at 3,000 basis points, the probability of another Argentine default has risen noticeably in recent days.

Swaps on Argentine debt blew out earlier this year when President Cristina Fernandez ordered the nationalization of energy firm YPF S.A. (NYSE:YPF). The move was viewed by foreign investors as the latest in a spate of anti-free market practices by the Fernandez Administration. Despite abundant natural resources, foreign companies and investors, generally speaking, are now apprehensive about Argentina due to increased political risk.

The nation's politics have plagued the economy and ARGT. Earlier this year, Colombia passed Argentina for the second spot among South America's largest economies behind Brazil. Year-to-date, ARGT is off nearly 25 percent, making it by far the worst-performing country-specific ETF tracking a South American nation. The next-worst performer among the marquee South America funds is the iShares MSCI Brazil Index Fund (NYSE:EWZ) with a loss 10.2 percent. ETFs tracking Chile, Colombia and Peru are all positive on the year.

In its ratings assessment, Fitch cited the faltering Argentine economy and rising political risk as other catalysts behind the downgrade. Standard & Poor's rates Argentina B- while Moody's Investors Services rates the country B3 negative. Both ratings are five levels above default.

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