S&P; Cuts Argentina’s Credit Rating to Just Above Default Status

NEW YORK —  Credit agency Standard & Poor’s Corp. on Tuesday cut its long-term sovereign credit rating for Argentina to just one notch above default status, citing the likelihood the country would restructure its debt and cost bondholders some of their investment.

Meanwhile, Argentine stock and bond prices stabilized after diving on Monday.

President Fernando de la Rua said the country continued to work on a “voluntary, consensual” local debt restructuring, and the government tried to dispel default fears.

But S&P; downgraded its ratings on the long-term debt of Latin America’s third-largest economy to double-C from triple-C-plus. S&P; affirmed its single-C rating for the nation’s short-term debt and kept the outlook for the debt at negative.

No other emerging-market economy holds such a low S&P; rating.

“The downgrade reflects the increased probability that Argentina will decide to comprehensively restructure its internal and external debt as signaled by government officials that have now made debt restructuring a priority solution to the fiscal and economic crisis,” S&P; said in a statement.

The downgrade comes one week after S&P; said it would cut Argentina’s credit ratings to “selective default” if bondholders suffered a loss in the debt exchange deal the government has been negotiating on its $132-billion debt load for months.

Prices of Argentine bonds have sunk to historic lows in recent days as Economy Minister Domingo Cavallo has forged on with a program he says will allow investors to voluntarily exchange high-interest-bearing bonds for new debt paying lower rates.

Racked by recession and its enormous debt load, Argentina has been struggling financially for much of the last year.

Argentine bond prices moved up slightly on Tuesday, while the Merval stock index gained 1.8% to 223.58 after plunging 8.7% Monday.

In other Latin American trading, Brazil’s key stock index fell 3.1% while Mexico’s main stock index lost 1.2%.

A default by Argentina would scar the country’s credit history, potentially blocking it from capital markets and pushing already sky-high interest rates even higher.

“Evidently the ratings agencies don’t want to be accused of missing the default, but we continue to believe that Argentina will prove to be the most anticipated default that never took place,” said Arturo Porzecanski, head of emerging markets economics at brokerage ABN AMRO.

In explaining the decision to downgrade the credit, S&P; said implementation of the government’s plan to cut its budget deficit to zero is almost impossible with tax revenues dropping--unless interest payments to bondholders are lowered.

President de la Rua is laboring to convince provincial governors to accept reduced federal funding, freeing up some government money for debt payments, in return for help in restructuring provincial debt.

Those talks stalled last week, but De la Rua has called provincial leaders back to the table today.

One great question mark is whether the United States again would come to the aid of Argentina.

The International Monetary Fund, heavily influenced by the U.S., already has bailed Argentina out to the tune of $22 billion since December with guarantees on debt payments.