It's been a decade since Argentina tarnished its reputation worldwide and became an economic misfit by engaging in the biggest sovereign debt default in history, yet it is still haunted by the old bonds.
Although Argentina's government restructured nearly all of the debt defaulted in the 2001 economic crisis, President Cristina Fernandez finds herself in a bitter U.S. court fight with holdout creditors that has raised the threat of severe financial repercussions.
The next step comes Friday when Argentina files its arguments for the final stage in its legal battle with NML Capital Ltd., an investment fund that specializes in suing over unpaid sovereign debts.
Argentina recently sidestepped economic chaos from the debt showdown when the 2nd U.S. Circuit Court of Appeals suspended a lower court's order for Argentina to pay $1.3 billion into escrow for holders of its defaulted debt, an action that risked pushing the country into technical default.
U.S. District Judge Thomas Griesa based his ruling on the principle of "pari passu," or equal footing, which says debtors can't pick and choose between creditors. In other words: pay everyone or pay no one and risk going into default.
Fernandez has refused to make such a payment, and uses the term "vulture funds" when she talks about NML Capital and others who have refused two opportunities to swap defaulted bonds for new, less valuable bonds that the government has reliably paid since 2005.
Analysts and Argentine media say Fernandez's legal team may argue that Griesa's ruling would hurt the world's financial system by giving financial speculators an enormous edge over nations that need to restructure debts and protect their citizens while trying to grow their way out of economic crises.
"Ninety-three percent of bondholders accepted the restructurings so, given the international situation, it would be irrational to rule in favor of the 'vulture funds' and pay them 100 percent," said Mariano Lamothe, an analyst with the consulting firm abeceb.com. "It would break any possibility of (future) debt swaps. Nobody would issue a bond in the New York Stock Exchange."
Other analysts support the debt holdouts.
Speaking during a teleconference Thursday organized by a lobbying group funded by NML Capital, legal experts expressed skepticism that such an argument would prevail.
"Argentina's claim that the pari passu clause will cause chaos in world markets is inaccurate," said Richard Samp, chief counsel for the Washington Legal Foundation. "The 2nd Circuit specifically recognized that Argentina is a unique case, and that sovereign debtors can avoid Argentina's predicament by including non-voluntary collective action clauses in their bondholder agreements, like Greece has done in the past."
John Baker Jr., a visiting fellow at Oriel College at University of Oxford, said debt contracts would become irrelevant if Argentina's position prevails.
"The 2nd Circuit should be applauded for determining that Argentina must be bound by its contractual commitment to treat creditors equally, and Argentina's claims that holdouts do not deserve to be paid are a clear strategy meant to continue avoiding the payment of billions of dollars it owes bondholders," Baker said.
Fernandez insists she won't pay a single centavo to the holdouts and calls Griesa's ruling "judicial colonialism." But analysts say that despite the government's tough public stance, Fernandez may be looking for time to negotiate over a new debt swap and avoid a new blow to the country's financial reputation.
"In Argentina there's a huge abyss between the official discourse and public policy," said Miguel Braun, an economist for the Buenos Aires-based Pensar consulting firm. "I wouldn't be surprised if Fernandez is saying all of this in her speeches and then goes on and does something completely different."
Just the threat of the Dec. 15 payment deadline set by Griesa had severe consequences. In the week after Griesa issued his order, the cost of maintaining Argentina's overall debt soared in trading on U.S. and European bond markets and the cost of insuring those debts spiked.
Several weeks ago, her administration struck a more conciliatory tone by saying it might be willing to pay the holdouts on the same terms as investors who joined the last debt restructuring in 2010. NML Capital and other plaintiffs have not commented on whether they would be willing to accept a swap on those terms.
The amount at stake in the current litigation is $1.3 billion, but all of the old bonds held by investors who didn't accept the debt restructuring total about $11.2 billion. If the U.S. courts eventually uphold Griesa's ruling, all those investors could demand immediate payment.
Ramiro Castineira, an analyst for the consulting firm Econometrica, sees a possibility that the courts may rule in favor of the "vulture funds" but also allow a more favorable schedule of payments for Argentina.
"There's a lot of uncertainty," Castineira said. "Whatever the court rules, both sides are going to appeal and try to take it to the Supreme Court, which must decide if it takes the case or not."
Associated Press writers Michael Warren in Buenos Aires and Luis Andres Henao in Santiago, Chile, contributed to this report.