An intensifying bout of volatility in South America's second-largest country has stoked fears of a full-blown financial crisis, with analysts warning Argentina could soon register its ninth sovereign default.
It comes after embattled President Mauricio Macri pledged to "re-profile" roughly $100 billion in debt this week. The plan, which requires congressional approval, was an attempt to shore up confidence in financial markets ahead of a presidential election later this year.
In response to the news, government bonds and the super-sensitive peso sold off on Thursday, as market participants deemed the proposal to be insufficient in tackling the country's severe financial troubles.
Standard & Poor's (S&P) also announced it had slashed Argentina's long-term credit rating by another three notches into the deepest area of junk debt. The credit rating agency said Macri's plan to "unilaterally" extend maturities of all short-term paper constituted default under its own criteria.
S&P attributed its decision to the "heightened vulnerabilities of Argentina's credit profile," citing the quickly deteriorating financial environment, the absence of confidence in financial markets about policy initiatives under the next administration and the inability of the Treasury to roll over short-term debt with the private sector.
The latest round of turmoil in the recession-hit country was triggered by a stunning result in primary polls earlier this month.
In a vote seen by many as a key gauge for the first round of Argentina's presidential elections on October 27, business-friendly Macri lost by a far greater margin than expected to the opposition ticket of center-left Alberto Fernandez and populist ex-leader Cristina Fernandez de Kirchner.
The result on August 11 cast serious doubt over the center-right incumbent's re-election chances in less than 60 days' time.
Analysts said the nationwide ballot proved voters were fed up with Macri's austere economic policy.
The primaries are widely seen as a relatively accurate indicator of public opinion ahead of the elections. That's because all parties take part and voter participation is mandatory.
The result was especially shocking because it showed Fernandez and de Kirchner could have enough support to avoid a potential run-off vote in November.
The primaries set off a shockwave in financial markets, with investors concerned a return of the left to power could represent a new era of interventionist policies.
On Wednesday, Treasury Minister Hernan Lacunza announced the government wanted to extend maturities on short-term debt and planned to negotiate new time periods for loans to be paid back to the International Monetary Fund (IMF).
Lacunza described the debt-extension plan as a "re-profiling" of obligations that would impact institutional rather than individual investors.
Argentina's government is "trying to stop burning through reserves fruitlessly" amid a collapse in rollover rates for its short-term debt, Fiona Mackie, regional director for Latin America at the Economist Intelligence Unit (EIU), said via Twitter on Thursday.
"This makes some sense, but this is looking more and more of a solvency rather than just a liquidity issue," Mackie said.
Macri borrowed $57 billion from the IMF last year on the agreement he would implement austerity measures to trim the country's huge debt and make the repayments.
Fernandez, who has become the front-runner to win presidential elections later this year, has said he wants to renegotiate the IMF pact.
"Failure of the re-profiling of medium-term debt would keep the risk of a credit event at elevated levels," Nicholas Watson, Latin American analyst at risk consultancy Teneo Intelligence, said in a research note.
"It would also revive the latent risk that this government simply cannot make it through to the end of its term as scheduled in December, and that the electoral and/or the handover needs to be brought forward," Watson said.
In an effort to prevent the peso from falling even further, Argentina's central bank spent $367 million of its reserves in the foreign exchange market interventions on Wednesday, followed by an additional $223 million in the previous session.
The peso closed slightly higher to stand at 57.9 per U.S. dollar on Thursday, but the currency is down nearly 22% since Macri finished a distant second in the primaries earlier this month.
IHS Markit's latest estimates, based on Thursday's closing level of Argentine 5-year credit default swaps (CDS), suggest that the probability of a sovereign default within a one-year period now stands at 64%.
Meanwhile, over a five-year period, the likelihood of default is seen at 85%.