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Argentina, hedge funds fail to strike deal on defaulted bonds

NEW YORK--Argentina failed to reach a deal Thursday with hedge funds demanding full payment on its defaulted bonds, veering closer to what the IMF warned could be a painful new default.

With less than a week to go to either pay up or risk being declared in default, Argentine officials met with a U.S. court-appointed mediator trying to break the impasse, but refused to meet the hedge funds' representatives directly.

“After speaking with both sides, separately, I proposed and urged direct, face-to-face talks between the parties. The representatives of the bondholders were agreeable to direct talks; the representatives of (Argentina) declined to engage in direct talks,” said the mediator, New York lawyer Dan Pollack.

“The issues separating the parties remain unresolved at this time.”

He said new talks would be held Friday.

One of the main funds battling for full payment, NML Capital, said Argentina had “made clear that it will be choosing to default.”

The Argentine government “refused to negotiate any aspect of the dispute,” it said. “There is currently a total lack of willingness on Argentina's part to solve this problem.”

With a July 30 payment deadline looming, time 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.

Under restructuring plans reached in 2005 and 2010, it has persuaded 92 percent of its creditors to accept write-offs of up to 70 percent.

But U.S. District Judge Thomas Griesa's ruling in favor of the so-called “holdout” hedge funds — which Argentina calls “vulture” funds — has trapped the country in a catch-22 situation.

Under the ruling, it cannot pay its other creditors without also paying the hedge funds; but under the restructuring deal, it is supposed to pay all its creditors the same.

If it pays the holdouts 100 percent of the US$1.3 billion it owes them, it could be forced to pay all remaining creditors in full, as well — for a total bill of up to US$15 billion.

'Substantial costs'

The International Monetary Fund's chief economist, Olivier Blanchard, warned a default could hurt both the Argentine economy and the global financial system.

“If it goes into default and doesn't pay the holdouts, there might be substantial costs, being basically unable to access markets for some time,” he said at a news conference where the IMF cut its global growth forecast for 2014 by three percentage points to 3.4 percent.

A default would also cast serious doubts on the ability of existing systems to resolve debt disputes when countries get into trouble, he added.

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