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Pro-government demonstrators, holding a banner that reads "Yes to our country, no vulture funds", march toward the U.S. embassy during a protest against U.S. High Court rule about "holdout" investors in Buenos Aires June 20, 2014.

© Enrique Marcarian / Reuters/Reuters

The clock is running down on Argentina's battle with what its president, Cristina Fernández de Kirchner, calls the "vulture funds" – New York hedge funds that bought the country's debt at steeply discounted rates and have fought a long legal battle to be repaid in full.

On June 16, the U.S. Supreme Court refused to hear an appeal of a 2012 verdict by New York District Judge Thomas Griesa, ordering Argentina to pay up – and the country has until the end of a grace period on July 30 to do so, or once again default.

This leaves Argentina with four options, none of them palatable: It can refuse to pay, and send an already teetering economy over the edge as global lenders shun the country; it could pay what it owes – which could use up as much as half of the country's foreign reserves; it could try to convert its restructured bonds into ones held locally in Argentina, beyond the reach of the New York judicial system, but that will be fiendishly difficult for a host of legal reasons.

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Or Argentina can make a deal with the vultures, to repay some quantity of what is owed, in some sort of instalment plan, in bonds. That is the best economic option for a country that has been working hard in recent months to repair its international financial reputation, and the one most observers are betting on now.

But the political cost of such a deal is enormous – and President Kirchner may well feel she cannot pay it.

Her leftist government faces a tough re-election fight next year, the economy is slipping into recession, and while the official inflation figure is 20 per cent, the real pace is estimated to be as much as three times higher.

The key protagonists in this case are NML Capital and other bond speculators who bought steeply discounted Argentine debt after the default of 2001. Nearly 93 per cent of the debt was covered in the restructuring, and creditors took a write-off of about 70 per cent on the value of their bonds. NML and a few others, however, held out; they have a long history of buying discounted debt and then using litigation to force repayment of the full value. They have used the same strategy on debt from Congo-Brazzaville and Peru, and they hold $1.3-billion (U.S.) of Argentine bonds.

The Supreme Court's decision provoked immediate denunciation from President Kirchner, who reiterated a vow that Argentina will not pay, but it was also sharply criticized beyond Buenos Aires – everyone from left-wing anti-debt groups to the International Monetary Fund says it will significantly undermine the workings of international finance in future.

"I've always been very antagonistic towards Cristina [President Kirchner] – she and I don't agree on a single thing, but in this specific case, I side with Cristina: this is a travesty from the standpoint of fairness and trying to have a debt system around the world that is fairer and more efficient," said Alberto Bernal, head of emerging markets at Miami-based Bulltick Capital Markets. "The [court] decisions undermine the capacity of markets to move on when debt events happen, and they will continue to happen."

Argentina's options are not pretty, said Eric LeCompte, director of Jubilee USA, an alliance working on global financial reform, but as a G20 country, it can find solutions. "But this precedent has an impact all over the world: It makes poor countries vulnerable, it hurts legitimate investors, the U.S. government said it could undermine the [U.S.] dollar – there are lot of losers here."

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Argentina has in recent months been making significant efforts to improve its financial reputation. It reached an agreement with creditors at the Paris Club and repaid the Spanish company Repsol for the nationalization of the petroleum company YPF. The implication, Mr. Bernal said, is that although President Kirchner herself retains her hard-left ideology, "her advisers have apparently been able to make her understand that is important to regain market access." (Repaying Repsol is something else Ms. Kirchner had vowed never to do.)

Although Argentina has maintained a positive balance of payments in the last few years, the government will be hungry for credit so it can develop the Vaca Muerta shale oil and gas field discovered in Patagonia in 2011, and avoid a huge energy import bill.

But President Kirchner knows that the public entirely opposes repayment, and supports her argument that Argentinans today cannot be held responsible for these debts, some of which trace their origin all the way back to the country's brutal military dictatorship, said Ricardo Rouvier, an economic analyst in Buenos Aires and former adviser to President Kirchnerin Buenos Aires. "The majority of the public don't know the technical issues involved, and they don't know what could happen [without repayment.] But the president is [privately] trying to negotiate, and she is going to leave it to the negotiators" and now try to keep the issue out of the public eye within Argentina, he said.

Marcos Leonetti, director of the Buenos Aires-based finance blog La Economia Online, predicts there will be a deal everyone can live with. "They will have to follow Griesa's sentence, but also get assurance that the payment can be made in instalments that don't require Argentina to compromise its economy's growth."

In 2002, when Argentina defaulted, the country was essentially reduced to running on barter, and hundreds of thousands of Argentines experienced severe economic hardship. Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, D.C., noted that Argentina has made significant progress since then: "There has been a huge reduction in poverty and increase in employment. Even though the last couple of years have been bad, they haven't really eroded those gains, and this should not be undermined."

In making a deal, Argentina needs to be careful not to trigger a legal mechanism which would oblige it to repay not only the "vultures", but also the other creditors who already settled for a much lower repayment, but who could seek to be repaid in full.

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Argentina has been waging an aggressive public relations campaign against repayment, Mr. Bernal noted, perhaps seeking to warn the vultures it could take the nuclear option and default. Full-page ads in U.S. and European newspapers say of the funds, "They purchased bonds in default at obscenely low prices for the sole purpose of engaging in litigation against Argentina and making an enormous profit."

The lawyer for the funds counters that they are serving a vital public function in making sure that contracts are honoured, and that kleptocratic governments cannot gamble with their nation's financial systems.

"If the vulture funds accepted the last offer that Argentina made, they would still have a 148 per cent return on their investment," Mr. Weisbrodt said. "But they're going for the 1300 per cent – that's what they'll get if they get the full value."

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