Argentina is on the brink of its second debt default since the turn of the century. Its officials meet with a US mediator later on Tuesday in the latest chapter of a decade-long debt battle with "vulture fund" bondholders who are demanding complete repayment from the Latin American country.
Fears of an imminent default sent Argentina's debt insurance costs soaring on Tuesday. How did it come to this and what happens next?
What happens this week?
Argentina has until 30 July to either negotiate a settlement, or repay so-called "holdout" investors who are suing the country for full repayment on their bonds. If it fails or refuses to pay by that deadline, Argentina will technically be in default. It would be the second time in 12 years after the country defaulted on around $100bn (£58bn) of debt in 2001-2002.
How did it come to this?
Argentina finds itself on the brink of a fresh debt crisis after a number of setbacks in US courts. The latest was in June when the US supreme court refused to hear an appeal against a ruling by a lower court that came down in favour of the holdout creditors. In doing so, America's highest court left the way clear for the holdouts to demand full repayment.
Why is 30 July so important?
Argentina also owes interest payments to bondholders who agreed to not to get full repayment of their investment under debt restructuring deals that followed the country's financial crisis. US district judge Thomas Griesa has said it would be illegal for Argentina to make a payment to those bondholders without also paying more than $1.5bn to the holdouts.
This latest deadline marks the end of a 30-day grace period beyond 30 June when the latest instalment of money was due to those creditors who did restructure debt – also known as "exchange bondholders".
Can Argentina afford to pay those exchange bondholders?
Yes it can afford to pay the exchange bondholders but it is not able to. Under the US ruling it can only do so when the battle with the holdouts is resolved.
Who are the holdout investors?
Also known as vulture funds, the holdout creditors are New York hedge funds which bought up debt worth $1.3bn at rock-bottom prices after Argentina's savage financial crisis of 2001-2. They account for a small proportion of the country's creditors and have refused to accept the terms of debt restructuring that followed the crisis, instead demanding repayment on the full value of the bonds. The holdouts are spearheaded by New York billionaire Paul Singer's NML Capital, an affiliate of Elliott Management, and Aurelius Capital Management.
What was that debt restructuring?
In the wake of the financial crisis, the then government in Buenos Aires came up with a way to make the country's debt more manageable. Under the restructuring, it offered bondholders a deal in which they would get regular payments of interest provided they accepted a more than 70% reduction in the value of their investment – known as a "haircut". More than 92% of creditors agreed to the offer – in many cases reluctantly.
Why won't Argentina pay the holdouts?
It argues that the funds bought most of the debt at a deep discount after the last default and have sought to thwart the country's efforts to restructure in two separate debt swaps in 2005 and 2010. It says it is unable to meet both the demands of the hedge funds and its regular interest payments to exchange bondholders.
It has taken out a series of adverts in major newspapers accusing the US courts of bias and the vulture funds of "harassment" and acting like "usurers".
President Cristina Fernández de Kirchner fears that any deal to pay more to the hedge funds would likely trigger lawsuits from other bondholders demanding to be paid on similar terms. Her government estimates that the liability could run up to $15bn.
What do the holdouts argue?
The holdout bondholders dispute Argentina's claims, saying in their own court filing there was evidence presented in lower courts that Argentina could afford to pay.
NML Capital and its parent Elliott Management last month accused Argentina's government of refusing to begin talks and of putting its country "on the brink of default".
What happens next?
An Argentine delegation meets with US mediator Daniel Pollack for last-minute talks on Tuesday.
Argentina's options are essentially:
Repay the holdouts in full – but this seems unlikely given the government says it cannot afford to do that and pay the money due to the exchange bondholders who took a haircut
Attempt to renegotiate terms with the holdouts
Default on everything – that would be a major setback for an economy trying to regain access to international markets. But this default would be technical, and done on principle, rather than out of necessity as in 2001-2002.
What are the implications for other countries?
Argentina has effectively been shut out of international markets for more than a decade so while a default would hurt the already struggling domestic economy it is unlikely to have serious repercussions in other markets, say analysts.
But debt campaigners say the rulings in the US have implications well beyond Argentina by undoing years of progress in reducing the debt burdens on poor countries. They say the US rulings set a precedent for other investors to wreck long-standing debt forgiveness deals with developing countries.