Argentina's Credit Rating Cut to `Caa3' by Moody's (Update6) By John Lyons

Buenos Aires, Oct. 12 (Bloomberg) -- Argentina's credit rating was cut below any other country by Moody's Investors Service, which said the Latin American nation is taking steps that may lead to a debt default.

Moody's reduced Argentina's ratings for foreign and local currency debt to ``Caa3'' from ``Caa1,'' after the government demanded domestic investors swap bonds for new securities paying lower interest. The exchange may presage a similar swap with international bondholders, Moody's said. Foreign funds and institutions own 60 percent of Argentina's $132 billion debt.

``It's difficult to see how they're going to get themselves out of the box they're in,'' said Scott Sadler, portfolio manager for $180 million in emerging market assets at Wachovia Asset management in Winston-Salem, North Carolina.

The downgrade may prompt more investors who are restricted from owning bonds with such low credit ratings to sell the securities. As recently as 1999, many investors bought Argentina betting its rating would be raised three levels to investment grade. That prospect helped enable the country to sell more dollar bonds than any other developing country in the 1990s.

Argentina's 3 3/8 percent floating rate bond due 2005 fell .05 to an offer price of 65.35 to yield 30.7 percent, about 8 percentage points more than the bond was yielding three weeks ago.

The country's international bonds now yield more than any emerging market debt, according to a J.P. Morgan Chase & Co. index.

`Pessimistic'

``I'm pessimistic about returns on Argentine debt,'' Art Steinmetz who manages $1 billion in emerging market debt for Oppenheimer Funds Inc.

Argentina, which already has defaulted four times in the 200 years since it became an independent country, secured an $8 billion loan from the International Monetary Fund in August to bolster reserves and reassure investors the government would avert a default.

The government, unable to boost tax receipts as a recession deepens, has cut pensions and wages and stopped transferring payments to provinces to help meet debt payments.

Argentina's rating has fallen below that of Ecuador, which defaulted on some of its debt in 1999, and Pakistan, which sold new bonds in 1999 after a debt default. Moody's decision follows a downgrade by Standard & Poor's earlier this week.

Some investors say that Argentine bond prices have fallen to levels that reflect a default.

``I doubt that there is any downside that has not been priced into bonds at this point,'' said James Barrineau, vice president for emerging markets at Alliance Capital Management, with about $6 billion in emerging market debt.

-- Guy Daley (guydaley1@netzero.net), October 12, 2001