By Richard Lough, Eliana Raszewski and Daniel Bases
BUENOS AIRES/NEW YORK (Reuters) - Argentina faces its second default in more than 12 years after talks with holdout creditors failed on Wednesday.
The country's economy minister, Axel Kicillof, speaking at a news conference at the Argentine consulate in New York, repeatedly referred to the holdout hedge funds as "vultures" after two days of talks failed to produce an agreement.
A last-ditch plan for Argentine commercial banks to buy out the non-performing debt held by hedge funds and avert a default collapsed on Wednesday, a senior banking executive and a second source from the financial market said.
"It all fell through," said the banking executive.
Kicillof had made reference to a potential private plan before news that those talks, too, had failed.
"Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default," Daniel Pollack, the court-appointed mediator in the case, said in a statement on Wednesday evening.
The default results from Argentina's failure to comply with a court order that holdout bondholders be paid at the same time as a $539 million coupon payment to those who accepted reduced payments in two prior restructurings.
Mark Brodsky, chairman of Aurelius Capital Management, one of the two leading hedge funds opposing the deal, referred calls to his spokesman, who said the firm had no immediate statement. Calls to the other leading holdout, NML Capital, a unit of Elliot Management Corp, were not immediately returned.
After defaulting in 2002, Argentina restructured its debt in 2005 and 2010. More than 90 percent of the bondholders agreed to accept new bonds with reduced payments. The holdouts refused the terms, and were awarded $1.33 billion, plus interest, by U.S. District Judge Thomas Griesa in New York.
A fresh default is not expected to affect Latin America's No. 3 economy as badly as the one more than a decade ago.
It is expected to worsen an economy already in recession, weaken the currency as more Argentines seek to hold dollars, and put pressure on foreign reserves. It could also raise soybean prices, as the country is the world's third-largest soybean exporter.
"The full consequences of default are not predictable, but they certainly are not positive," Pollack said.
Kicillof said Argentina offered the holdouts similar terms as other creditors who recently negotiated with the country as it attempts to regain the good graces of international capital markets that it has been frozen out of since its default. Those terms were rejected, Kicillof said.
He said he planned to return to Argentina after the news conference, saying the country will take all measures needed to face what he called an unfair situation.
"Argentina paid, it has money, it will continue to pay the next installments because we want to do so and because the money is available," he said.
"This money is there. If it were a default, there would be no money."
However, Griesa called Argentina's payment illegal and rejected its argument that it has fulfilled its obligations.
Kicillof reiterated the country's position - that it cannot pay the holdout hedge funds without triggering a clause that would cause it to renegotiate with bondholders who accepted restructured debt agreements after the country defaulted in 2002.
The holdout hedge funds want full repayment on bonds they bought on the cheap after the country defaulted, a demand Argentina has so far rejected.
The Buenos Aires government pushed hard for a stay of the ruling by Judge Griesa that set Wednesday's deadline. The country has until midnight Wednesday (0400 GMT on Thursday) to break the deadlock, having exhausted a 30-day grace period to deliver a coupon payment on exchanged bonds.
Argentina has consistently argued that a so-called rights upon future offers, or RUFO, clause prohibits it from settling with the holdouts. That clause expires at the end of 2014.
Kicillof said Argentina has already made that payment, as it deposited $539 million in the Buenos Aires account of trustee agent Bank of New York Mellon. As of Tuesday, that money was still there, according to a source at the Argentine central bank.
U.S. ratings agency Standard & Poor's downgraded the country's long- and short-term foreign currency credit rating to "selective default," from triple-C-minus and C, respectively. S&P cited Argentina's failure to make a June 30 coupon payment on its discount bonds due in 2033, which it does not rate. The default rating will remain until Argentina makes a payment, the agency said.
"The making of the payment is not an automatic process - it takes time for that to happen," said Roberto Sifon-Arevalo, managing director at S&P.
Prior to the collapse of the talks, Argentina's markets rallied on optimism for a deal. Yields on Argentina's key dollar bond due 2033 fell to its lowest level in about three and a half years on Wednesday, touching 8.89 percent, and its MerVal index <.MERV> hit a record. The cost to insure Argentine sovereign debt fell.
Markets are likely to reverse those moves on Thursday.
"We'll give up today's gains and then some on Thursday. We have to start pricing for the risk that this may not be a negotiation tactic or legal tactic," said Siobhan Morden, head of Latin America strategy at Jefferies in New York.
"If the private sector solution is not real, I'll have to reassess for a much lower target than 68 (cents on the dollar) on the Discount bonds."
In a sign of Thursday's possible reaction, U.S.-traded shares of Argentine energy company YPF
(Additional reporting by Alejandro Lifschitz and Sarah Marsh in Buenos Aires, Carolyn Cohn in London and Rodrigo Campos and Luciana Lopez in New York; Editing by David Gaffen, Jonathan Oatis and Ken Wills)
