BUENOS AIRES — Argentina looks set to default on its debt for the second time in 12 years next Thursday as negotiations with "holdout" investors seemingly go nowhere and neither side shows signs of blinking first, though a last minute deal can't be discounted.
Latin America's No. 3 economy has for years fought the holdout hedge funds which snapped up its junk bonds after its $100 billion default in 2002 and then refused the restructuring terms, suing for repayment in full.
But time is up. After a slew of legal setbacks for Argentina in U.S. courts, the country has just days to comply with a 2012 ruling by U.S. District Judge Thomas Griesa to pay $1.33 billion plus interest to the funds it calls "vultures."
If the deadlock persists, Griesa will prevent Argentina from making a July 30 deadline for a coupon payment on exchanged bonds, triggering a new default just as the economy struggles with recession, dwindling reserves and soaring inflation.
"The outcome is still uncertain, with just days before a technical default is triggered," said analyst Mauro Roca of Goldman Sachs. "A deal now seems unlikely."
Unlike Argentina's 2001-02 debt crisis when it was broke and could not pay its civil servants, this time around the country is solvent but prevented by Griesa from servicing its bonds until the battle with the holdouts is resolved.
Argentina's combative stance has upped the odds of a default. Efforts to find a solution through a mediator have made scant progress, with one of the lead holdouts saying the government had made clear "it will be choosing default".
Argentina's president, Cristina Fernandez, has not minced words, branding the holdouts extortionists and lambasting the judge for a ruling she says is unjust.
A high-stakes game of poker is playing out. Griesa's ruling prohibits Argentina from servicing its restructured debt until it settles with the holdouts.
If neither side flinches, Argentina will default as of July 31. Although it will have sufficient finances to service its foreign currency restructured debt, worth $35 billion, it will be unable to get payments to creditors outside Argentina.
A default won't send shockwaves through the global economy: Argentina is already isolated from international capital markets. How much pain it causes at home will depend on how quickly Argentina can extricate itself from the mess.
On Friday, Argentine debt negotiators left mediator Daniel Pollack's office after just one hour, pouring more cold water on hopes for a deal, which now seems the least likely outcome.
Even if Argentina does pull off a deal, it will come too late to haul the economy out of recession this year.
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