BUENOS AIRES, Aug 1 (Reuters): Argentina's bond and stock markets and peso currency dropped on Thursday after Latin America's No. 3 economy defaulted for the second time in 12 years following the collapse of last-ditch talks with holdout creditors.
The default came after Argentina failed to strike a deal with lead holdout investors NML Capital Ltd, an affiliate of Elliott Management Corp and Aurelius Capital Management, in time for a midnight Wednesday EDT (0400 GMT) payment deadline.
"Those who expect us to sign any old thing, threatening us that the world will come to an end otherwise, should not count on me," Argentine President Cristina Fernandez said in her first comments since the default.
The government maintains it has not defaulted because it made a required interest payment on one of its bonds due 2033, but US District Judge Thomas Griesa in Manhattan blocked that deposit in June, saying it violated his ruling.
At that time, Griesa deemed the $539 million deposit with the Bank of New York Mellon, Argentina's trustee bank, was illegal because it did not include a concurrent court-ordered payment of $1.33 billion plus accrued interest to the holdout investors.
Griesa scheduled a new hearing in New York on Friday at 11 a.m. EDT (1500 GMT) to discuss the default.
Buenos Aires argues that agreeing to the hedge funds' demands to pay them in full would break a clause barring it from offering better terms to them than to those who accepted to steep writedowns in the 2005 and 2010 swaps.
Both Argentine Economy Minister Axel Kicillof and Fernandez warned that the country could bring more lawsuits to challenge the contention that it is in default.
Bondholders who participated in the two prior restructurings of the 2002 default now have to decide whether to seek immediate full payment of principal and interest on their restructured debt, a process known as acceleration.
This process requires 25 per cent of the bondholders on each of 16 bonds issued in the 2005 and 2010 restructurings to ask BNY Mellon for a formal decision on default. The bank has 60 days to decide.
"I don't think at the moment there is a clear answer to whether bondholders will accelerate a deal. It's probably not something most bondholders would like to see," said Olivier De Timmerman, fixed income fund manager at KBC Asset Management in Luxembourg.
Another formal declaration of a default could come as soon as Friday from a committee of buy- and sell-side investment firms organized by the International Swaps and Derivatives Association (ISDA). They will decide if a side-bet made on insuring Argentine government debt is payable.
Argentina's default is generally not seen unleashing financial turmoil abroad because it has been isolated from global credit markets since its 2002 default on about $100 billion of debt. But the cost of insurance on the South American country's sovereign debt surged on Thursday.
It has foreign currency restructured debt worth about $35 billion, including $8 billion under local law, while its foreign exchange reserves stand at $29 billion.
Buenos Aires has dubbed holdout investors "vultures" for picking over the carcass of their broken economy.
Even a short-term default would raise local companies' borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates.
Thursday's market moves reversed a strong rally from Wednesday when investors had widely anticipated a last-minute deal. Argentina's dollar-denominated Discount bond due 2033 fell 8 points in price to bid 88 cents on the dollar, driving the yield up to 9.85 per cent. The peso fell 2.52 per cent to 12.570 per dollar.
The Merval stock index fell 8.4 per cent. Shares traded locally in Argentine energy company YPF were down 9.18 per cent at 356 pesos per share. The default is likely to raise borrowing costs for YPF, which issued a $1 billion, 10-year global bond in April.
Asset prices were down sharply but market participants said they still expected either the government or third parties to reach a deal eventually with the holdout investors.
