Argentina admitted Monday it may default on some of its debts but downplayed the consequences, just two days before time expires in negotiations with hedge funds demanding full payment on their bonds.
Officials are flying to New York on Monday to take a fresh stab at breaking the impasse with the so-called "holdout" hedge funds, who refused to join the restructuring of debt left by a 2001 default.
A US judge has blocked payments on the restructured debt as long as Argentina refuses to pay the holdouts, which it brands "vultures".
But, with no visible progress in talks with the holdouts, President Cristina Kirchner's chief of staff, Jorge Capitanich, said the country could fail to make a $539-million payment on the restructured debt by the Wednesday deadline.
"Argentines need to stay calm, because life goes on," he told a press conference, promising that the government would "guarantee that the economic system continues to function."
The US court-appointed mediator overseeing the talks, New York lawyer Dan Pollack, said he would hold new meetings with the Argentinian delegation Tuesday.
"I again urged direct, face-to-face conversations with the bondholders, but that will not happen tomorrow," said Pollack, who has tried to get the sides to sit down together and accuses the Argentines of refusing.
Pollack sought to inject new urgency into the process, referring to "the gravity of this situation and the shortness of time to resolve it without default."
Argentina, the third largest economy in Latin America, has been trapped in a Catch-22 by US District Judge Thomas Griesa's ruling in favor of hedge funds NML Capital and Aurelius Capital Management.
Under the ruling, it cannot pay the 92 percent of creditors who agreed to the restructuring of its debt without also paying the hedge funds the full $1.3 billion it owes them.
That order prevented Buenos Aires from making a payment on the restructured bonds on June 30, but gave it a 30 day grace period before the creditors declare the country in default for the second time in 13 years.
Yet the restructuring plan could fall apart if Argentina pays the hedge funds in full, as it could unleash a flurry of claims for equal treatment by other creditors who had agreed in 2005 and 2010 to take a 70 percent haircut on their bonds.
- Dire forecasts -
Analysts warned Monday that a new default would only exacerbate the problems facing the Argentine economy, which is likely in recession already.
"An economic contraction of 3.5 percent, annual inflation of 41 percent and a drop in consumption of 3.8 percent will be the indicators at the end of 2014 in the event of a default," consultancy Abeceb.com said at the weekend.
Argentina has taken a defiant approach to negotiations with the holdouts, insisting the only possible solution is for the judge to suspend his ruling until the end of the year.
That would take the talks beyond the expiry date for the clause in the restructuring deals that entitles all bondholders to equal treatment, known as a Rights Upon Future Offers, or RUFO, clause.
"Argentine authorities seem to have reached the conclusion that to default now and renegotiate later would be the less costly option," said Carlos Caicedo, Latin America analyst at IHS Country Risk.
He said the consequences of a default would include a delayed return to foreign capital markets which have already locked out Argentina.
It could also spark further devaluation for the peso -- already down 20 percent in January -- which would in turn fuel inflation, with prices having already risen 15 percent in the first half of the year.
The hedge funds -- which bought up Argentine debt at a steep discount -- could also lose in a fresh default.
That would leave them among the many creditors trying to negotiate the best possible deal with Argentina, whose reserves currently stand at around $29 billion, far too little to pay all bondholders in full.
The gap between the two sides remains wide as the deadline looms.
Capitanich reiterated Buenos Aires' demand for the judge to suspend his ruling Monday.
"Argentina needs time to negotiate, and that time is called a 'stay,'" he said.