Welcome to CrushTheStreet.com’s Weekly Market Wrap-Up!
Our top story for this week is Argentina’s debt default, a shocking though not entirely unexpected news item that was released by the embattled country’s finance minister, Axel Kicillof, from the confines of the Argentine consulate in New York City. The statement came after he had convened an ultimately unsuccessful meeting with a group of hedge fund creditors negotiating over $1.3 billion worth of debt owed to them for over a decade.
According to Mr. Kicillof, Argentine Republic filed for a stay on payment with the judge presiding over the case, but the conditions of that stay were dependent upon the hedge fund’s cooperation, which obviously chose not to oblige. The fund cited in the long recurring legal battle is NML Capital, a collective of investors led by billionaire Paul Singer.
Argentina’s Government Bond Contracts
The heart of the legal conflict centers around what is known as the Rights Upon Future Offers, or the RUFO clause that is built into Argentina’s government bond contracts. Under RUFO, if Argentina negotiates better terms with some bondholders, all bondholders have a claim on those terms. That would open the nation up to $15 billion dollars worth of payments since the clause would be triggered if Argentina were forced to settle their debts with NML Capital. NML has stood firm on the legal wranglings, refusing to take any haircut at all on the debt it acquired during Argentina’s economic crisis of 2001.
A week earlier on July 22nd, Judge Thomas Griesa rejected the Republic’s RUFO argument and its plea for a stay on payment, which left little choice but for Argentina to surrender payment under adverse conditions or default on its debt. Due to the reluctance of NML to offer any leeway, they have been labeled as a “vulture fund,” with the finance minister accusing NML of extortion.
Crisis for Argentina’s Citizens
Unfortunately, the penalty under the RUFO clause is minor compared to total liabilities that may be incurred under the acceleration clause claims, where bondholders can immediately sue for all their money at once. This amounts to $29 billion dollars, or everything in Argentina’s central bank. That means the real victims of this current crisis is the Republic’s citizenry, which will more than likely face another prolonged round of hyperinflation and economic turmoil.
After the whistle blew on the final World Cup match between Germany and Argentina, it was reported that several thousand Argentines refused to leave Brazil, claiming that conditions were far better within their otherwise bitter rival’s borders. This latest news suggests that their stay will last far longer than originally anticipated.
S&P Dow Jones Indices
Domestically, all ten of the S&P sectors were down, with the broader index suffering a 2% loss. The Dow Jones dropped more than 300 points, causing the index to run flat year-to-date. Many individual names lost their July gains as other fundamental factors, namely escalating turmoil in Ukraine, pressured global equity markets.
Precious Metals & Bitcoin
Gold and silver absorbed some losses due to speculation that the Federal Reserve may raise interest rates based on a rising employment cost index. Palladium was the least affected amongst the precious metals, although it too dropped nearly a percent of valuation. In the digital currency sector, bitcoin suffered heavy losses earlier in the week, but managed to claw its way back to $590 dollars.
And that will do it for this edition. Thanks for watching and we’ll see you next week!