Argentina's Markets Pull Back After Debt Default

Stocks and bonds in Argentina tumbled following the country's second default in 13 years, as doubts emerged about the prospects for a bank-engineered deal to resolve a standoff with hedge-fund creditors and government officials suggested they could take the fight to an international court.

Aurelius Capital Management LP, one of Argentina's creditors, played down media reports that banks were preparing to purchase the so-called holdouts' bonds. Argentine media had reported that private-sector banks were attempting to arrange a deal to help Argentina pay off debt it owes the funds, which have sued for full payment on bonds the country defaulted on in 2001.

J.P. Morgan Chase & Co. was in talks to buy bonds from a group of hedge funds demanding full payment from Argentina, a person familiar with the matter told The Wall Street Journal.

"Aurelius has received no such proposal that we considered worthy of serious consideration," the hedge fund said in a statement.

Argentina's benchmark Merval stock index was down 6.5% late afternoon on Thursday.

Argentina's dollar-denominated bonds due in 2033, on which an interest payment was due on Wednesday, fell to near 90 cents on the dollar Thursday, from a closing price of 96 cents late Wednesday, traders said. Bond yields rose to 9.7%, from 8.8%. Prices move in the opposite direction as yields.

Still, analysts said investors were reluctant to sell while there was prospect of a resolution.

"The expectation of a bank deal is supporting bond prices," said Siobhan Morden, head of Latin America strategy at Jefferies LLC. "But it's difficult to trade these headlines when you're getting whiplashed" by sharp price moves in thin trading. "Most people have adopted their view, taken their positions, and waited to see what the final outcome will be, " Ms. Morden said.

Investors and analysts view a deal between banks and the holdout creditors as the best hope to pull Argentina out of default. A U.S. District Court has ruled that Argentina must pay the so-called holdout creditors when it pays holders of restructured bonds.

On Wednesday, a 30-day grace period on the interest payment ran out and Standard & Poor's Ratings Services declared the country in default on some bonds. Fitch cut Argentina's foreign currency rating to restricted default.

The International Swaps and Derivatives Association was to rule on Friday whether Argentina's failure to make certain bond payments would trigger a payout on insurance contracts linked to that debt.

In Argentina, cabinet chief Jorge Capitanich said the country's situation raises questions about the "precariousness of the U.S. justice system," and said the government would take its battle to the International Court of Justice in the Hague. Government negotiators ended talks in New York on Wednesday with a U.S. court-appointed mediator and flew back to Buenos Aires.

Argentina's latest default can trace its roots to the country's decision to repudiate about $100 billion in debt during a deep economic crisis in 2001. After years of confrontation with creditors, investors exchanged almost 93% of their defaulted bonds for new securities in restructurings in 2005 and 2010 that gave them just 33 cents on the dollar.

But some investors refused to take the new bonds, with many suing in U.S. courts for full repayment. These included hedge funds led by Elliott Management Corp.'s NML Capital Ltd. and Aurelius Capital Management LP, which have won about $1.6 billion after years of litigation.

U.S. courts had jurisdiction over these lawsuits because Argentina had agreed in some of its bond contracts to resolve any disputes under New York law.

In a statement early Thursday, NML said the mediator "proposed numerous creative solutions," but "Argentina refused to seriously consider any of them, and instead chose to default."

After Argentina denounced several U.S. court rulings awarding judgments to creditors and consistently refused to pay the holdouts, U.S. District Judge Thomas Griesa issued an unprecedented ruling in 2012 that barred Argentina from paying its restructured bondholders unless it also paid the holdouts. That ruling was upheld by the Second Circuit Court of Appeals and in June the U.S. Supreme Court declined to hear Argentina's appeal.

Judge Griesa had scheduled a hearing on Friday. A clerk for the judge said the hearing would discuss Argentina's default and "where the parties go from here."

A prolonged default would pressure an economy already mired in recession, potentially leading to higher inflation and a weaker currency. The breakdown of negotiations complicates Argentine President Cristina Kirchner's efforts to stabilize the economy before she steps down in December 2015.

Argentina deposited $539 million for the interest payment on restructured bonds with Bank of New York Mellon Corp. on June 26. On Thursday, BNY Mellon sent a letter to bondholders explaining why the interest payment was missed.

"The nature and timing of any future court order regarding the funds are not yet known," the letter said.

Mr. Capitanich, the Argentine cabinet chief, argued that the country isn't in default because it deposited the payments with the trustee on time. Investors should pressure the bond trustee to get their money, he said. "Many bondholders who participated in the restructurings don't have an aggressive judicial attitude as if the money wasn't important to them. What they ought to do is demand their payment."

(Emily Glazer, Katy Burne and Ben Edwards contributed to this article.)