If you borrow money and stiff the lender, there's usually a price to pay.
As it approaches a July 30 payment deadline on some $82 billion in government bonds, Argentina is getting close to finding out just what that price will be.
After failing to reach a deal Friday-after just one hour with a U.S. court-appointed mediator-an Argentine delegation headed home to consider its next move in a historic battle with "holdout" creditors who want their money back.
"Argentine authorities seem to have reached the conclusion that to default now and renegotiate later would be the less costly option," said IHS Latin America analyst Carlos Caicedo in a note to clients.
The case is being closely watched by bond investors-and other debtor nations-around the world, as officials in Buenos Aires near the endgame in a long-running battle with the holdouts.
The complex legal battle has come to a fairly simple end. On Wednesday, Argentina faces the deadline for a $539 million interest payment to a group of bondholders who agreed to a series of restructurings-in which Argentina imposed a 70 percent "haircut" on a series of bonds issued in 2001.
But another group of creditors, holdouts led by a group of hedge fund investors, refused to go along with the haircut and are insisting they are owed the full $1.3 billion worth of bonds they bought. Earlier this year, a U.S. federal court agreed and ruled that Argentina has to pay all investors-or pay none of them, and default.
Argentine officials have asked U.S. District Judge Thomas Griesa to stay his ruling to give them more time to negotiate with the holdouts. As the clock ticks down, the holdouts insist there are no legal grounds for the judge to grant such a stay.
Based on a recent jump in the price of the restructured bonds, investors seem to be assuming that logic will prevail and a deal will be reached before Wednesday's deadline, according to Bradford Jones, a portfolio manager at Sagil Capital,
"But this is a country that has defaulted seven times in the past," Jones told CNBC. "So 'Logic will prevail' and 'Argentina' don't necessarily go together."
To be sure, cutting a deal with the holdouts carries certain risks. After standing their ground for this long, and winning a substantial legal victory, the holdout investors are expecting to be paid more than those who agreed to a haircut. That raises the prospect that bondholders who took the restructuring offer would demand a similar treatment.
But a default also has consequences, even for serial defaulters like Argentina. Barring a last-minute deal-or a reprieve from Griesa-here's what Argentina can expect if it can't reach a deal with the holdouts:
Limited access to capital: As its government wrestles with high inflation and dwindling cash reserves, Argentina's economy has slipped into recession this year and is expected to remain in reverse for the remainder of 2014. A default would make it much more difficult and more costly to attract the capital needed to revive Latin America's third-largest economy.
Avoiding default, on the other hand, would lift the cloud of uncertainty and spark a new round of billions of dollars in fresh investment, according to IHS analyst Caicedo.
Provincial debt defaults: Argentina's central government isn't the only one looking to borrow more money. Provincial governments, struggling with budget deficits widened by double-digit inflation, have borrowed heavily to make their payrolls. Last year, the federal government had to refinance some $11.5 billion in provincial debts owed in 2014. A default now by the federal government would cut off provincial governments' access to fresh, dollar-based bonds, Caicedo noted.
Devaluation: With reserves dwindling, Argentina would face added pressure to undergo another round of devaluing its peso. That would further fuel inflation, which private economists say is running at about 25 percent a year. Higher inflation would bring fresh demands for salary increases from government workers, putting added pressure on provincial budgets.
-By CNBC's John Schoen. Follow him on Twitter @johnwschoen or email him.
- Budget, Tax & Economy
- government bonds