Mounting provincial debt will add to Argentina risks

Subject

The outlook for provincial debt.

Significance

On September 3, Moody’s downgraded the debt rating of ten sub-national jurisdictions. Since the 2016 deal with holdout creditors, most provinces have been active debt issuers in local and global markets. Thus the debt ‘reprofiling’ announced by the central government in late August, and the higher debt burden due to the combination of recession and devaluation, are raising concerns about their ability to keep servicing their debt.

Impacts

• In the event of a new debt restructuring, limited access to capital markets will force provincial spending cuts.
• If the financial crisis deepens, provincial debt could again be bailed out by the central government.
• A more comprehensive reform of provincial finances will be needed to improve fiscal discipline in the long term.