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Buenos Aires - Argentine President Cristina Fernandez's unflinching poker face in the battle against "holdout" investors suing the country is increasing the odds that her government will default for a second time in 12 years at the end of this month.
She has refused to budge from her stance that Argentina cannot pay out in full to the holdout hedge funds, which snapped up bonds on the cheap after its $100bn default in 2002. That is despite indirect talks aimed at cutting a deal.
Fernandez last week told leaders of the Brics emerging economies that it was "impossible" to pay holdouts the full face value of the debt they hold.
The funds, she said, could enter a bond swap matching the terms of restructuring deals in 2005 and 2010, which saw creditors accept large writedowns.
It is an old offer the holdouts have previously scoffed at and they have no reason to take it now given that US courts have ruled in their favour and put Argentina, Latin America's No. 3 economy, on the verge of default.
Argentina's lawyer told a judge in New York presiding over the legal fight that a settlement would not be reached by a July 30 deadline, even with round-the-clock talks, and renewed the country's request for more time to negotiate.
Fernandez's aggressive tone has repeatedly angered holdouts and the US judge at the centre of the case, making it more difficult to cut a deal.
"The chances of a default have increased. I am still hoping they are playing a game of poker" said Claudio Loser, an Argentine who worked for decades at the International Monetary Fund (IMF) and now is president of advisory firm Centennial Group.
The tough-talking Fernandez has pledged to keep paying the country's restructured debt but vows never to pay at face value the "vultures" that bought the bonds at a steep discount and are suing for full payment.
Argentina's exclusion from global capital markets means an eventual default would be highly unlikely to send shockwaves through emerging markets worldwide.
But it would further weaken Argentina's peso currency, which has fallen 20% on the official rate so far this year, and fuel upside risks to inflation, privately estimated to be running above 30% annually. Government figures are lower.
Foreign reserves, which hit an eight-year low this year, stand at $30bn and could fall by up to a third, Loser estimated, in a fight to shore up the currency and cover a rising import bill.
While time is running out, some investors hope Fernandez will reach a late deal so that Argentina can once again tap global markets to bolster its thin reserves and finance the development of vast shale oil and gas resources.
"I don't see any scenario in which a default is positive, not even for Cristina's ideology," said Alberto Bernal, a partner at Miami-based Bulltick Capital Markets.
"It would mean she defaults on the bonds that her late husband restructured," Bernal said, referring to Fernandez's partner and predecessor as president, Nestor Kirchner. "She knows that the benefits from an accord would be enormous."
Optimism waning
For years, Argentina refused to negotiate with the holdouts.
Now it has run out of legal options to circumvent a 2012 ruling by US District Judge Thomas Griesa that it pay the funds of $1.33bn, plus interest. Griesa also ruled it could not service restructured debt before settling with the funds, meaning it would fall into default.
The spread between upside and downside price risk on the Discount bonds showed the probability of a settlement slipping to 65 to 35 last week from 75 to 25 in favour of a settlement in the week ending July 11, said Siobhan Morden, head of Latin America Strategy at Jefferies.
Argentine over-the-counter dollar-denominated bonds slid after the hearing, before recovering some of the losses.
The bid price on the Discount bond was down 1.1% on a day earlier at $86.65 at 22:25 while the Par bond was 0.8% lower at $50.80.
"Clearly Argentina is running out of time," said Ignacio Labaqui, analyst for consultancy Medley Global Advisors. "Today is the first time I have seen the market believing that Argentina might default."
If Argentina does not schedule a meeting (this week), the assumption would be bond prices would discount higher deal risk ahead of the deadline, analysts said.
The Argentine economy ministry did not respond to requests for comment after the hearing.
Argentina also says capitulating to the holdouts would break the so-called Rufo clause prohibiting it from servicing debt on terms better than those accepted by creditors who took the haircut.
That could trigger challenges from other holdouts and bondholders worth more than $100bn, the government says.
"There are no signals that show Argentina is getting ready to pay," said Guillermo Nielsen, a former finance undersecretary who was in charge of the 2005 debt restructuring. "There's a feeling we're heading to a default."
Deliberate default
Argentina in late June deposited $539m with the Bank of New York Mellon but Griesa blocked the funds' onward transfer to creditors, triggering a 30-day grace period up to July 30, and called Argentina's move "explosive".
"While government officials could still be "guided" toward more constructive actions that help avoid default ... we lower the probability of avoiding default to just above 50%, down from 65%," said Daniel Kerner, practice head of Eurasia Group's Latin America division.
There may also be a way around the Rufo clause which, in an extra twist, expires on December 31. That would involve the feuding sides agreeing to a delayed settlement as of January 1, 2015, with some form of guarantee written into the deal.
"Most lawyers believe if payment is made into an escrow account, as mandated by a judge, it wouldn't classify as violating the Rufo clause," Kerner said.
However, a deliberate default cannot be ruled out. In that scenario, Argentina may try to launch a new bond swap under Argentine legislation in a bid to escape the US lawsuits. It would be a move fraught with risk.
"Perhaps the risk is higher for exchanged bondholders converting to holdouts and demanding par claim after a technical default as opposed to exchanged bondholders demanding par claim on violation of Rufo," said Morden.
