Argentina was engaged in a last-ditch attempt to avert its second debt default in 13 years last night as tense negotiations with bondholders ran to the wire ahead of a midnight deadline in New York.
Markets were optimistic that a deal could be hammered out at the eleventh hour, with the value of the country's bonds and shares rising.
Hopes were boosted by the prospect of a potential intervention by Argentina's banking association. Under the proposals, a consortium of Argentinian banks would offer to buy the country's debt held by so-called holdout investors, who refused to join other bondholders in taking a haircut on Argentina's debt holdings in restructuring deals in 2005 and 2010.
A US judge ruled this year that the holdout investors should be paid in full, saddling Argentina with a bill of more than $1.5bn (pounds 885m) that it cannot afford.
An agreement appeared some way off, however, after a senior banking executive familiar with the offer and quoted by Reuters said that discussions had yet to be held with the hedge funds involved.
Axel Kicillof, Argentina's economy minister, was holding late-stage talks in New York with its holdout creditors and US mediators to try to reach an agreement and avoid a default.
Neil Shearing, at Capital Economics, said that negotiations were likely to be taken to the brink of the deadline. "There is still a lot of uncertainty surrounding this and it is going down to the wire. The chances of an eleventh hour agreement are higher than they were on Tuesday but we may well end up with a default. " The deadline of midnight New York time marks the end of a 30-day grace period after Argentina was blocked from paying a $539m instalment due on its restructured bonds on 30 June. The payment was due to the vast majority of Argentina's bondholders who accepted the debt restructuring deals in 2005 and 2010, wiping value off their holdings, and which the government wanted to honour.
The move was blocked, however, by the US judge Thomas Griesa, who ruled Argentina could not pay the restructured bonds back unless it also paid more than $1.5bn to the holdout investors. Argentina has insisted it cannot afford to do both. Led by the country's president, Cristina Fernandez de Kirchner, Argentina has refused to pay investors she has branded "vulture funds", which are holding out for full repayment. The fear in Argentina is that any deal to repay the holdouts in full would trigger lawsuits from the bondholders who accepted haircuts in 2005 and 2010. Buenos Aires estimates that the associated liability could run to $15bn.
The holdouts are US hedge funds spearheaded by the billionaire Paul Singer'sNML Capital, an affiliate of Elliott Management, and Aurelius Capital Management.
More than 90% of Argentina's bondholders agreed to the debt restructuring 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. A spokesman for the Argentinian embassy in London said yesterday there was no update on the talks in New York and that negotiations were continuing.
Emiliano Surballe, analyst at the Swiss private bank Julius Bar, said Argentina faced mixed outcomes from the talks, even if it avoids a default.
"Choosing to default should free up cash resources. However, it would completely shut down access to foreign funding," he said.
"Avoiding the default has two main consequences: it could generate contingent liabilities from other creditors, but would open the door to access international financial markets."
Economy minister, Axel Kicillof in New York, hoping to make a deal with holdout investors Photograph: Carlo Allegri/Reuters