By Marc Jones and Hugh Bronstein
LONDON/BUENOS AIRES (Reuters) - Argentina's battered bonds were driven still lower on Friday after a credit rating cut from Standard & Poor's triggered automatic selling mechanisms at major pension funds.
Risk spreads blew out to levels not seen since 2005 while the local peso currency extended its year-to-date swoon to 36%.
S&P Global slashed Argentina's rating to CCC- into the deepest area of junk debt, saying a plan announced on Wednesday by the country's government to "unilaterally" extend maturities of many of its bonds had triggered a brief default.
Importantly, it also took the average rating between the big three rating firms - S&P, Moody's and Fitch - down to CCC. For many big German institutions that level is classed as too risky to hold under Versicherungsaufsichtsgesetz or VAG rules.
It saw Argentina's 2033 euro-denominated bonds slump 4.7 cents and a 2027 version drop nearly 2 cents. The peso opened 1.86% weaker at 59 to the U.S. dollar, extending losses over the last three weeks to 23%. So far this year the peso has weakened 36% against the greenback.
"A CCC rating is actually more meaningful than a default (rating)," Aberdeen Standard's head of emerging market sovereign debt Edwin Gutierrez said.
"German pension funds can't hold CCC so that is actually the bigger trigger for selling," he said, adding that its rules weren't as strict on default-stricken bonds.
Friday's selling extended the rout in Argentina's markets since business-savvy President Mauricio Macri was thumped by populist-leaning Peronist Alberto Fernandez in primary elections this month.
Argentina's more widely held international dollar bonds fell further too. The July 2028 dropped 1.4 cents while the 2022 issue dropped 2.5 cents.
Argentine spreads measuring risk of default versus safe-haven U.S. Treasury paper blew out 176 basis points to 2,447 on Friday, their highest since 2005, according to JP Morgan's Emerging Markets Bond Index Plus index.
Investors in Argentina fear a return of the left to power could herald a new era of heavy government intervention in Latin America's third-largest economy.
They also suspect that the plan to extend maturities will do little more than buy time and not be able to prevent a more serious default further down the line.
A hundred-year bond Argentina issue to much fanfare two years ago is trading at a record low of 40 cents on the dollar, showing the kind of write-down markets are now bracing for.
"We are probably around fair value (in bond prices) but it is the nature of these beasts that the price always overshoots (before it levels out)," said Gutierrez.
The cost of insuring exposure to Argentina's sovereign debt also rose, with the country's 5-year credit default swaps reaching 3,618 basis points, up 19 basis points from Thursday's close, IHS Markit data showed.
(Reporting by Marc Jones in London; Hugh Bronstein, Walter Bianchi, Gabriel Burin and Hernan Nessi in Buenos Aires; Rodrigo Campos in New York; Editing by Tom Arnold, Hugh Lawson and David Gregorio)