Moody's Pushes Argentina Rating Further Into Junk

Moody's Investors Service cut its rating on Argentina further into junk territory, citing challenges the government faces in addressing capital outflows and a lack of access to international debt markets.

The downgrade by Moody's comes nearly two months after Argentina devalued its peso, a move that raised fears of a financial crisis in one of South America's largest economies.

Argentina has faced a dollar crunch, with Moody's on Monday saying a combination of persistent capital flight and declining trade surpluses have put pressure on official international reserves, which fell to $27.5 billion from a high of $52.7 billion in 2011.

"While reserves have stabilized in the last month, there are continued high risks of further drops, a key credit risk since Argentina lacks international market access and uses central bank reserves to meet its foreign currency debt obligations," Moody's wrote in a report.

Too few reserves could prompt the country to default on its debts again or fall into a deep recession because it can't buy the imports it needs to keep its economy going. The Argentina government hasn't tapped international debt markets since before its 2001 default.

Moody's trimmed the nation's government bond rating by one notch to Caa1, putting it seven levels into junk. The outlook for the new rating is stable, signaling Moody's sees no further changes in the near future.

Moody's on Monday said inflation, which had averaged 25% annually in recent years, will likely spike higher in 2014, partly due to the currency devaluation in January.

And despite some talks of lowering energy subsidies, Moody's said the government hasn't reduced ongoing fiscal imbalances. It also expects the central bank's policy of higher interest rates and faster currency depreciation will hurt the region's economy.

"Political challenges will also reduce the government's room to maneuver as unions resist official efforts to keep wage increases below expected inflation," Moody's said.