Argentina Stock Market Crash Reverses After Today's Deal - for Now

Monday, a stock market crash to the tune of a 12.22% drop hit the Merval Argentina Stock Market Crash in Argentina (BCBA: IAR), the most important index of the Buenos Aires Stock Exchange. The index fell to 5,847.78 by market close on Monday - 15% from its all-time high hit just six days prior.

But today, Argentina's stock market got relief. Stocks are up 1.14% after the country's lawyer said it will negotiate with a group of hedge funds that are suing over $1.33 billion in bonds.

The move is historic since Argentina had said it would never negotiate with the group - but, after what happened this week, they had little choice...

The Judgment That Sparked Argentina's Stock Market Crash

Behind the stock market crash was a decision by the U.S. Supreme Court to decline hearing an appeal by the country over a bond dispute.

More than 10 years ago, Argentina defaulted on approximately $100 billion in sovereign debt. It restructured the debt and offered bondholders new debt worth around $0.30 on the dollar in 2005 and again in 2010. About 7% of the old bondholders did not agree to the deal - the "holdout" creditors.

The country has been making payments on its new bonds, but hasn't done so on the old bonds since 2001.

As a result, investment firms, including Olifant Fund Ltd. and billionaire Paul Singer's NML Capital Ltd., sued Argentina to make it pay on the old bonds if it was paying on the new. The lower court agreed with the holdout creditors, and years of appeals ensued.

Monday's Supreme Court decision put an end to it. The High Court declined to hear Argentina's appeal, meaning the lower court ruling sticks, and the country is on the hook to pay the holdout creditors $1.33 billion before it may service the rest of its restructured debt.

The decision meant Argentina would have to default on its debts or reach a settlement with the holdout creditors. In a 7-1 ruling, the justices also granted the creditors access to bank records tied to Argentina's assets.

"America's highest court has spoken," NML Capital said in a statement. "It is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina's economy and its international standing."

In an address to the nation, Argentina President Cristina Fernández said that Argentina will honor all its restructured debts - but did not say how.

Now it looks like we could get some answers next week...

The Argentina Bond Crisis Going Forward

In a national address on Monday, Fernández referred to NML Capital as "vultures" and said that Argentina would not be able to comply with the court's June 30 payment deadline. She previously hinted that a default will be the country's chosen course of action, but that she was willing to negotiate.

According to Forbes, Fernández said that paying the owed sum in cash per the court order might trigger $15 billion in other cash payments to other holders of defaulted debt - a situation she says is "not only absurd but impossible," since the amount is equivalent to more than half of Argentina's remaining foreign reserves.

The country is also losing foreign currency reserves at the fastest pace in over a decade. According to Bloomberg, these funds - which the country relies upon to pay debt and finance energy imports - have dwindled to a seven-year low of $28.3 billion.

Meanwhile, rampant inflation (current estimates place it around 28%) and softening exports continue to wrack the nation.

Yesterday (Tuesday), Standard and Poor's lowered Argentina's credit rating by two levels, from CCC+ to CCC- - the lowest rating for any country currently assessed by S&P.

"We would consider interruptions to debt that is currently being serviced as a new default," said S&P in a statement. "A default or a distressed debt exchange pertaining to currently serviced debt appears to be inevitable within six months, in our view, absent unanticipated significantly favorable changes in Argentina's circumstances."

The country's bonds maturing in 2033, which are affected by the decision, were down 9.3% on average on Monday, according to JPMorgan Chase & Co. (NYSE: JPM).

Bloomberg reported that extra yield investors demand to own Argentine bonds over Treasurys widened to 8.84 percentage points (a 0.34 percentage point gain) Tuesday afternoon, marking the highest borrowing cost in emerging markets behind Venezuela.

U.S. District Judge Thomas Griesa in 2012 ordered Argentina to pay $1.33 billion to the holdouts at the same time it pays bondholders who participated in the restructurings. They are due a payment on June 30. If it's not received, Argentina will be in a technical default. (There is a 30-day grace period).

"What I want is a legal mechanism to prevent another situation where the Republic can laugh off another judgment," Griesa said on Wednesday, as reported by Reuters.

Argentina's Economic Minister Axel Kicillof announced earlier today that the country wanted to swap bonds under U.S. jurisdiction for those under Argentine law - but any such change that did not end in payment is still a default. Kicillof's statement triggered even lower debt prices today.

Argentine officials are to begin negotiation next week with the hedge funds. But as they say, "there's no squeezing blood from a stone." The holdover creditors will have to come to a deal.

NEXT: If enough Main Street investors learn to spot and use these three rules, Wall Street will find itself at our mercy. And what a day that will be. Let's examine each of the three, starting with the basic building block: jobs...

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