Argentina was on the brink of its second debt default since the turn of the century last night, as hopes faded that last-minute talks would hammer out a deal with "vulture fund" bondholders.
Argentinian officials met a US mediator in New York in the latest chapter of a decade-long debt battle with hedge funds that bought up the country's bonds at rock-bottom prices in the wake of its financial crisis in 2001 and 2002.
The creditors are demanding full repayment on their investments, having refused to join the vast majority of Argentina's bondholders in accepting debt restructuring deals in 2005 and 2010 that would have seen their value slashed.
The value of the bonds, plus interest accrued, amounts to more than $1.5bn (pounds 885m), which a US judge says is due to the so-called holdout bondholders.
If Argentina fails to or refuses to pay that amount by today, it will technically be defaulting on its debt obligations. It would be the second time in only 12 years, after the country defaulted on around $100bn of debt during its previous financial crisis.
Analysts said a technical default looked increasingly likely given the scant progress on any agreement in recent weeks, but there were reassurances that it would have few repercussions for global markets.
The International Monetary Fund's managing director, Christine Lagarde, said the impact on other countries would be limited because of Argentina's effective isolation from international markets for more than a decade.
"While default is always regrettable, we do not believe that it would have major substantive consequences outside, on a much broader basis," she said last night.
"The outcome of the legal decisions that are being made in New York at the moment . . . have much broader significance," Reuters quoted her as saying. "The debt restructuring principles and the efficiency of collective action clauses will have to be reviewed," she said, alluding to work the IMF has done on sovereign debt contracts and how to deal with post-default issues.
Unlike the last default when Argentina was unable to pay, this time it would be more on a point of principle rather than out of necessity. The government has said, however, that it cannot afford to pay the holdouts in full and meet its other interest payments. The US hedge funds contest this and have accused Argentina's government of refusing to begin talks.
Branded vulture funds by Argentina and debt campaigners, the creditors holding out for full repayment are New York hedge funds spearheaded by the billionaire Paul Singer'sNML Capital, an affiliate of Elliott Management, and Aurelius Capital Management. They account for a small proportion of the country's creditors.
More than 92% of Argentina's bondholders agreed to deals in 2005 and 2010, under which they would get regular interest payments provided they accepted a reduction of more than 70% in the value of their investment, which is known as a haircut.
The government attempted to pay the holders of restructured debt their latest interest payment at the end of June, but without also paying more than $1.5bn to the holdouts.
Argentina now appears to have reached the end of the road on averting a fresh default. The latest deadline marks the end of a 30-day grace period beyond which the latest instalment of money was due to the creditors who restructured debt in 2005 and 2010, also known as exchange bondholders.
The country's president, Cristina Fernandez de Kirchner, fears that any deal to pay more to the hedge funds could trigger lawsuits from other bondholders demanding to be paid on similar terms. Her government estimates that the liability could run up to $15bn.
Graffiti reading 'no to the debt payment' in Buenos Aires, Argentina, which has said it cannot afford to pay 'holdout' bondholders Photograph: Marcos Brindicci/Reuters