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Argentina's debt fight: What it is, why it matters

NEW YORK--Argentina's 13-year fight with creditors erupted in U.S. courts last week, and the results were messy.

Argentina had asked the U.S. Supreme Court to overturn a lower court's ruling that it must pay US$1.5 billion to hedge funds for bonds Argentina had defaulted on in 2001. The Supreme Court refused to hear its appeal — a victory for the hedge fund investors whom Argentina's president, Cristina Fernandez, had called “vultures.”

Fernandez had said Argentina couldn't afford to fully pay the hedge funds while also making payments to other lenders. But late last week, signs of a possible resolution emerged. Fernandez said she would seek a U.S. judge's support for resolving all of Argentina's unpaid debts in one grand bargain.

Her note of conciliation helped lift prices of Argentine bonds. Still, dangers remain. The ruling said that if Argentina didn't give the plaintiffs all the money they're due, it couldn't use U.S. banks to make its other interest payments, which are due June 30.

One misstep and Argentina could slide toward another default, which would likely spread trouble beyond its shores.

Just how did Argentina wind up in this mess? Here are some questions and answers:

Q: What happened after the Supreme Court turned Argentina down?

A: A lot. The Supreme Court also decided to let bondholders subpoena banks in U.S. courts to track down Argentina's assets abroad. The decisions drove the country's Merval stock index down 11 percent on Monday.

The next day, the rating agency Standard & Poor's cut Argentina's rating further into junk territory — to CCC-, S&P's lowest grade for any country.

For most countries, the rating agency's move would be a harsh blow. It would inflate borrowing costs and make it harder to finance budgets. But Argentina's troubles are so well-known that the downgrade came as little surprise. Argentina hasn't borrowed from the bond markets since its default in 2001.

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