In a conference falling Tuesday's announcement that Fitch had upgraded various ratings on Argentine debt, Morgan Harting, the debt-rating agency's lead sovereign analyst for the country, said the repayment of $9.4 billion in debt to the International Monetary Fund earlier this year had left "amortizations quite low compared to other speculative grade sovereigns."

But while this improved debt servicing schedule provided justification for the upgrades, risks exist beyond the end of 2007, Harting said.

One of these is political, he said. President Nestor Kirchner is expected to hold strong political control going into presidential elections next year, but the continuity of his administration does not assure a favorable outlook for bondholders, Harting said.

"One could argue that a concentration of power in the hands of a man like Kirchner is credit positive," Harting said, noting that he "has run fiscal surpluses and appears to have been a prudent steward of public resources."

Such optimism, however, "rests on the assumption that the executive will place long-term stability and prosperity ahead of his short-term political gain or even survival," he said.

"The fact is," Harting said, "that Kirchner is an elected official, and all of his incentives are clearly aligned with a desire to stay in office and, perhaps too, to improve the political prospects of his wife." The first lady, Cristina Kirchner, a leading senator, is seen as a possible presidential candidate in place of Kirchner for the 2007 elections.

"President Kirchner in practice has shown a tendency to implement short-term fixes rather than a coherent long-term development program," Harting said, noting with special concern the political risks associated with a willingness to meet debt obligations.

Meanwhile, the relatively easy financing demands could nonetheless become complicated if "Argentina's few sources of financing dry up," he said. Among potential buyers of government debt, Harting said local banks are reducing their exposure to government debt and that local pension funds are at the limit of their permitted holdings.

He also cited risks to a continuation of support from the government of Venezuela, whose purchases of $3.5 billion in newly issued Argentine bonds since the beginning of last year have been vital. Venezuela's capacity to buy bonds is contingent on high oil prices, he said, which can't be assured.

Most important, he said, Argentina can't issue directly into international markets because "holdout" bondholders who rejected the terms of last year's $103 billion restructuring of defaulted debt may seek to attach securities or debt service payments on the new bonds.

Moreover, he said, the economic outlook is clouded by a "policy framework that leaves a lot to be desired."

While the 5% growth rate predicted for 2007 "is certainly sound," the country runs the risk that "supply bottlenecks" will eat into growth in coming years, he said. Price controls, inconsistent contractual arrangements and export restrictions are undermining Argentina's capacity to attract investment, he said.

And on the fiscal front, he warned that "surpluses today will probably turn into deficits by the end of next year" as wage increases eat into provincial finances.

Still, if the government were to resolve the problem of the $20 billion in holdout debt, strengthen the rule of law and create "market mechanisms" for price-setting and resource allocation, "we would become a lot more bullish" on Argentina's long-term prospects, Harting said.

For now, though, even with the new B rating it has attained for its performing local-law bonds, Argentina doesn't stand up that well against Uruguay and the Dominican Republic, two other Latin American sovereign borrowers with comparable ratings.

Uruguay, for example, has higher debt-to-gross domestic product ratio, but it has a B+ rating, one notch above Argentina's, because it has access to international markets and a "more coherent" policy framework, Harting said.

The Dominican Republic, meanwhile, which has a B rating for foreign currency debt - on par with Argentina's best bond rating - has clearer prospects for international finance and economic growth than Argentina with an export-driven policy framework, he said. The Dominican Republic should be "marginally better able to manage a tighter liquidity situation than Argentina," Harting added.

In fact, Argentina only marginally beats Ecuador, which has a B- rating for long-term credit, Harting said. Although Ecuador is also running surpluses, the country faces bigger liquidity problems and while Argentina's "policy framework is no better, it is clearer who's in charge in Argentina," which he said is less susceptible than Ecuador to "mob rule."