Argentina denied Thursday it was considering paying a "guarantee" to hedge funds demanding full payment on defaulted bonds as it held crunch talks to prevent a new default.
With less than a week to go to either pay up or risk being declared in default, the Argentine government stuck to the defiant tone it has struck throughout its legal wrangling with the funds, rejecting reports that it could resolve the crisis by agreeing to pay them a guarantee at talks in New York.
"Nobody can demand a guarantee from a sovereign country," cabinet chief Jorge Capitanich told journalists in Buenos Aires, lashing out at US District Judge Thomas Griesa for blocking the government's effort to restructure its debt.
"We're in an absurd situation caused by an absurd ruling that absolutely must be corrected by the judge," he said.
Time (NYSE: TIME - news) is running out for Argentina to deal with the fallout of its 2001 default, which plunged the country into an economic crisis it is still battling back from.
It has persuaded 92 percent of its creditors to accept writeoffs of up to 70 percent, but is now facing a Catch-22: under Griesa's ruling, it cannot pay its other creditors without also paying the hedge funds; and under the restructuring deal, it is supposed to pay all its creditors the same.
If Argentina pays the so-called "holdout" hedge funds -- which it calls "vulture" funds -- 100 percent of the $1.3 billion it owes them, it could be forced to pay all remaining creditors in full, as well.
The part of the restructuring deal that enforces that agreement -- called a Rights Upon Future Offers, or RUFO, clause -- expires at the end of the year.
But the grace period for the beleaguered South American country to start paying its restructured debt expires on June 30.
- Unpredictable consequences -
Argentina dismissed speculation that plans were in the works to bridge that gap by paying the hedge funds a guarantee, as the two sides headed into last-ditch talks with the mediator appointed by Griesa to break the deadlock, lawyer Dan Pollack.
"We were not notified of what the vulture funds are going to propose," Capitanich said.
One of the main funds battling the Argentine government, Aurelius Capital Management, also denied any such plans.
The hedge funds, led by Aurelius Capital and NML Capital, bought up Argentine debt when it was already in default, then sued the country to stop it from carrying out its restructuring plan with an initial payment of $539 million scheduled for last month.
Argentina is pushing for Griesa's decision to be suspended until the end of the year so it can go ahead with restructured payments.
Analysts say a new Argentine default would wreak less immediate havoc on its economy than the 2001 crisis. The government has been locked out of capital markets since its last default, so its day-to-day finances would not change substantially.
But the broader consequences of a default, both in Argentina and on world markets, are unpredictable.
Argentine President Cristina Kirchner downplayed the risk of a default Wednesday.
"I want to say to all Argentines that Argentina is not going to fall into default for a very simple, essential reason: because defaults are for countries that don't pay, and Argentina pays," she said.