By Sarah Marsh and Eliana Raszewski
BUENOS AIRES (Reuters) - Argentina's battle with investors who rejected its proposals to restructure debt risks pushing the nation into a new default that would wreck its attempts to return to credit markets but not have the same economic effect as its catastrophic 2001-02 default.
The U.S. Supreme Court declined on Monday to hear Argentina's appeal against lower court rulings that ordered it to pay in full the hedge funds which refused 2005 and 2010 debt swaps on $100 billion in debt.
As the risk of default rises, Argentina must now either negotiate a deal with the funds it dismisses as "vultures" or quickly find a way around the court rulings that would prevent it from paying holders of its restructured debt if it doesn't also agree to pay the holdouts.
Argentina's battle with investors who rejected its proposals to restructure debt risks pushing the nation into a new default that would wreck its attempts to return to credit markets but not have the same economic effect as its catastrophic 2001-02 default.
The U.S. Supreme Court declined on Monday to hear Argentina's appeal against lower court rulings that ordered it to pay in full the hedge funds which refused 2005 and 2010 debt swaps on $100 billion in debt it issued in 2001.
As the risk of default rises, Argentina must now either negotiate a deal with the funds it dismisses as "vultures" or quickly find a way around the court rulings that would prevent it from paying holders of its restructured debt if it doesn't also agree to pay the holdouts.
Economy minister Axel Kicillof announced Tuesday the government is taking first steps to swap restructured debt to place it under Argentine law and make payments in Argentina. He also said he sent Argentine lawyers to talk to U.S. District Court Judge Thomas Griesa in New York about his ruling, as it's pushing the country into a default, even when Griesa said he doesn't want to do that.
Still, a new default won't likely bring on the same economic devastation the 2001-02 default did, policymakers and economists said.
"The economic situation was different," said Jorge Todesca, the deputy economy minister in 2002, noting that the economy had shrunk 10 percent over three years, the country had a trade deficit and "commodity prices were half of what they are now."
The state and banks were heavily indebted and industry had been battered by a decade of the peso pegged to the dollar.
At the end of 2001, thousands of Argentines lined up at banks to withdraw their savings, sensing the whole system was on the verge of bankruptcy. The country defaulted at the end of 2001, the currency crashed and the economy shrank 10.9 percent in 2002.