Argentina rewarded by the markets

Javier Milei would certainly have preferred a World Cup victory, but there is still something to celebrate in Buenos Aires: Moody’s has upgraded Argentina’s sovereign debt rating from Caa1 to B3 and changed the outlook from stable to positive: “The risk of default has fallen significantly, as macroeconomic stabilisation has moved from an initial adjustment phase to a more sustained improvement in credit fundamentals.” The rating agency highlights the progress made by the Milei government on various fronts: sustained budget surpluses, falling inflation, economic liberalisation, an improved external position, the recapitalisation of the Central Bank, the accumulation of international reserves and reduced volatility.

Moody’s upgrade is the third in a matter of months, following those by Fitch and S&P. The rating agencies have simply confirmed what the market had already priced in, with the spread falling to 400 points from 2,500 when Milei won the election in 2023. However, with all three of the ‘Big Three’ having removed Argentina from Category C, many institutional funds can now invest in Argentine securities, whilst international banks face reduced capital requirements for operations in the country. This could mark a turning point in the financial programme of Economy Minister Luis Caputo, who has so far avoided a permanent return to the international capital markets whilst awaiting a fall in interest rates. So far, the government has paid off maturing debts using its own reserves or loans from international institutions and multilateral organisations. Now, particularly if the spread were to breach 400 points, a window of opportunity is opening to refinance maturing debt on the market, thereby reducing pre-election volatility. Milei’s re-election in 2027 also depends on macroeconomic stability. And vice versa. Because the main threat to the stability of the economy at present is ‘political risk’: the danger that Milei might lose the election.