Debt rating agency Standard and Poor's declared Argentina in "selective default" on Wednesday, as Buenos Aires remained locked in last-ditch talks with the US hedge funds it has branded "vultures."
It was the second time in 13 years Argentina has been ruled in default, and served as a bad omen for the success of a marathon negotiation underway in New York with the stubborn creditors.
Economy Minister Axel Kicillof was expected to emerge from the talks to give a news conference in New York after the deadline for making a $539 million payment on Argentina's restructured debt expired.
Argentina had deposited the sum -- for payment to those bond holders who had accepted a write-down in deals reached in 2005 and 2010 -- in a bank account when it was due at the end of June.
But a New York judge blocked the bank from forwarding the payment to the restructured creditors unless it also paid two US hedge funds the full value of their bonds, $1.3 billion, at the same time.
Argentina and these funds -- NML Capital and Aurelius Capital Management -- have spent the last two days locked in talks in New York with a US court-appointed mediator to try a set a deal on payments before the expiration of a 30-day grace period.
S&P's designation of "selective default" acknowledges that Argentina is current on payments to some creditors and is probably able to make some payments on the debt it has defaulted.
It also said it could remove the default label once the country makes the payment on the restructured bonds.
Buenos Aires has until the end of Wednesday to resolve its dispute with the so-called "holdout" hedge funds.
These funds bought Argentine debt cheaply when Buenos Aires was in difficulty, and refused to accept a write-down when Latin America's third-largest economy defaulted in 2001.
Kicillof is now holding last-ditch talks with the US court-appointed mediator tasked with resolving the standoff, lawyer Dan Pollack.
Buenos Aires has insisted the only possible solution is for US District Judge Thomas Griesa to suspend his ruling in favor of the hedge funds.
Kicillof, who flew in from Venezuela to add his weight to the negotiations, vowed after Tuesday's talks to "work at this with every bit of serious attention the issue deserves."
Pollack said there had been a "frank exchange of views and concerns."
- Catch-22 -
Griesa's ruling has trapped Argentina in a Catch-22.
Buenos Aires says paying the holdouts, which it calls "vulture funds," could expose it to claims for up to $100 billion from creditors who had previously agreed to take a 70-percent haircut.
If Argentina pays the hedge funds in full, as Griesa has ruled, the 2005 and 2010 debt restructuring deals -- in which creditors accepted a 70-percent write-down -- could fall apart.
The 92 percent of creditors who agreed to take a haircut could launch claims for equal treatment under what is called a Rights Upon Future Offers, or RUFO, clause.
The RUFO clause expires at the end of the year, leaving Argentina scrambling to find a way to placate the holdouts until then.
Markets were however hopeful for a last-minute deal.
Argentine stocks closed up nearly seven percent on Wednesday.
Analysts have warned a default would deepen the economic malaise gripping Argentina, exacerbating its already troubling inflation -- prices rose 15 percent in the first half of the year -- and perhaps forcing another devaluation of the peso, already devalued 20 percent in January.
A default would also likely prolong Argentina's isolation from international capital markets, which it has been locked out of since halting payments on its more than $100 billion in foreign debt in 2001.
That default, the largest in history at the time, plunged Argentina into an economic and social crisis that it is still battling to overcome.
The global consequences of a new default would however be far smaller than in 2001, analysts say, as Argentina has since been isolated from world financial markets.