Argentina’s Economy Now in Harm’s Way

With a default on most or all of Argentina’s $130 billion in government debt all but certain, attention now turns to the fallout for that nation’s economy, including harm to its banking system.

On Friday, bond rating agency Fitch Inc. downgraded Argentina’s debt to just a cut above default status, discounting chances of an orderly swap of debt as proposed Thursday night by President Fernando de la Rua.

The debt swap could save the government as much as $4 billion in interest next year, but it would leave investors with as little as 30 cents per dollar of bond face value.

Argentina is thus primed to join a list of countries--including Russia, Ecuador and Pakistan--that have defaulted on their sovereign debt in recent years. Argentina is in the depths of a four-year recession, evidenced by October tax revenue declining 11% from a year ago.