"Reckless" Argentina risks threat to growth When Argentina's interim president, Adolfo Rodríguez Saá, declared default on nearly $100bn on December 23, 2001, lawmakers gave him a standing ovation. Few are cheering now at the very real fear of a new Argentine default 11 years later. A ruling by New York judge Thomas Griesa, ordering that an upcoming payment to holders of the bonds Argentina issued in restructurings in 2005 and 2010 be accompanied by a $1.3bn payment to US funds suing to collect in full, raises the prospect of Buenos Aires choosing to pay no one, analysts and lawyers say. "Argentina's policy towards its default has been pretty reckless," said Matthew Parish, a partner at law firm Holman Fenwick Willan in Switzerland, who has worked on other sovereign restructurings and now expects Argentina to choose default on its restructured debt over payment to the "holdouts" it has slammed as vultures and says deserve nothing. They [Argentina] decided to give creditors the flick for several years. Then they tried to re-enter bond markets holding a gun to the old creditor guys" heads. Now their conduct will result in their being completely locked out of bond markets," he said. Argentina also faces a rash of other litigation from exchange bondholders, irate at what they say is disregard for their property rights. They are preparing an immediate appeal. The ruling could also open the door to potential copycat suits from other holdouts. Economists estimate some $8bn to $11bn of Argentina's debt remains in the hands of holdouts, while $25bn of its restructured debt was issued under New York legislation. The default scenario is very different to 2001, when Argentina was in the teeth of recession, its peso pegged unsustainably at par to the dollar and domestic bank deposits frozen. The default came after fatal riots and Fernándo De la Rúa, the president quit and fled in a helicopter. Argentina's economy has stuttered this year, after growth of 8.9 per cent last year and expansion of above 8 per cent in seven of the last nine years. Though the government is widely accused of overstating economic growth in recent years, many analysts believe the economy has touched bottom. Nevertheless, the government of Cristina Fernández has imposed import controls and currency restrictions - including forcing provincial governments to repay dollar debt issued under Argentine legislation in pesos - to ensure that the big soya and cereals exporter does not run out of dollars. It has tapped central bank's reserves - now at $45bn - to pay its debt obligations since 2010 and relies on intra-government borrowing, including from the state pensions agency, since it has been virtually cut off from international lending since its 2001 default, the world's biggest sovereign crash. However, the statist economic model championed by the populist president, who expropriated energy company YPF from Repsol of Spain without compensation earlier this year, is showing signs of strain. Inflation is running at about 25 per cent and the board of the International Monetary Fund meets on December 17 to discuss sanctioning it over faulty inflation data. "The impact of a fresh default could be much greater for Argentina's provinces and corporate, which are more dependent on external financing, and would be likely to suffer a spike in borrowing costs," Michael Henderson of Capital Economics said in a note. Argentina could, of course, comply with Judge Griesa's order and pay the $1.3bn he says is due to NML Capital and other plaintiffs into an escrow account, pending the appeals process, by December 15. Argentina is due to pay $3.4bn to restructured creditors in December. However, Ms Fernández has repeatedly refused to pay even a dollar to funds she decries as "vultures," and the government has been embarrassed by the seizure of the Libertad, a navy frigate, at the behest of NML in Ghana on October 2. Its fate remains in limbo. If Argentina sought to pay the exchange bondholders but not the holdouts, it would be in contempt of the court order. The penalty for that could include sequestration of assets and relevant officials being unable to travel to the US and threatened with imprisonment. If Argentina pays no one, it would be defaulting on the court's judgment - meaning that the ruling could be enforced against Argentine assets, basically continuing the chase to collect that has held a gun over the government's head and prevented it from accessing international capital markets for the last decade. And a fresh bond default could be triggered. Argentina would have a 30-day grace period in the event it does not make the scheduled payment to holdouts before default would result, noted Daniel Marx, a former finance secretary. The dispute between Argentina and hedge funds led by Elliott Capital stems from an "equal treatment" clause. Following is a brief recap ●New York Judge Thomas Griesa ruled in February that Argentina needed to treat holdouts on an equal footing with creditors who restructured their debt. Argentina says holdouts had the chance to be treated equally by participating in the restructuring ●In a surprise move, a US federal appeals court on October 26 upheld Judge Griesa's ruling but asked him to clarify the payment mechanism and the impact on third parties. Those include the Bank of New York Mellon, the trustee of Argentina's restructured bonds, which acts as a conduit of its payments to investors in these securities ●Judge Griesa's frustration with Argentina was evident in a November 9 hearing ●His ruling on Wednesday that Argentina will have to pay $1.3bn to hedge funds that refused to restructure their debts will now return to the appeals court as both Buenos Aires and exchange bondholders have vowed to appeal