Martin Cornejo shrugs his shoulders when asked if he’s worried Argentina may be days away from defaulting for the second time in 13 years. No one expects a repeat of the last economic collapse, he says.

“This is very different to 2001,” when Argentina defaulted on a record $95 billion of debt, said Cornejo, who works at a newspaper kiosk in central Buenos Aires. “People knew then it was going to happen. Now, they don’t pay attention.”

That’s bad news for hedge funds Elliott Management Corp. and Aurelius Capital Management LP who are using the threat of another default and economic crisis to pressure President Cristina Fernandez de Kirchner to comply with a court ruling and pay them $1.5 billion. The nation will be in default on July 30 if it doesn’t reach a settlement with the funds, led by billionaire Paul Singer.

While a default would bring devaluation, a deeper recession, rising inflation and pressure on already dwindling reserves, it wouldn’t have the same repercussions as 13 years ago, said Eduardo Levy-Yeyati, director of Buenos Aires-based research firm Elypsis. That time round 38 people were killed in protests and riots and the government was forced out of office after restricting bank deposit withdrawals amid 22 percent unemployment.

‘Just a Recession’Fernandez, 61, is concerned an accord with the hedge funds would trigger a clause in the bond contracts that prohibits Argentina from making a better offer to holdouts than it did to creditors who took losses of about 70 percent in restructurings in 2005 and 2010. The president says that clause could lead to claims of $500 billion and has asked for more time.

“Cristina must have advisers who aren’t entirely wrong when they say this isn’t 2001 and that at the end of the day it’s just a recession,” Levy-Yeyati said. “If the holdouts offer them a stay I think she’ll negotiate,” otherwise she’ll choose default, he said.

Fernandez said today the nation has reduced its debt-to-gross domestic product ratio and will continue to pay its debt in a timely fashion. The country won’t enter an economic crisis if there’s a technical default, she said.

“They say we’re going to live through the 10 plagues of Egypt” if there’s a default, Fernandez said during a speech in Caracas. “We already lived through the 10 plagues in 2001.”

U.S. District Court Judge Thomas Griesa blocked $539 million of interest payments to bondholders last month until Argentina reaches an agreement with the holdouts and prohibited banks from distributing payments to foreign investors.

Black Market

Alejandro Martinez, a black market currency trader, says he isn’t seeing any of the panic dollar buying that accompanied the 2001 economic crisis. While the black market peso has fallen 7.3 percent to 13 pesos per dollar this month, part of that has been fueled by Argentines seeking dollars for their winter holiday, he said.

“The dollar’s gone up a bit more but it hasn’t rocketed,” Martinez said.

Argentina’s economy contracted 0.2 percent in the first quarter after Fernandez devalued the peso and raised interest rates to halt a slide in foreign reserves. The devaluation led annual inflation to quicken to 40 percent in June from 24 percent a year earlier, according to a survey of private economists compiled by opposition lawmakers.

Economic Woes

While the economy is in stagflation, it’s still a far cry from 2002 when gross domestic product fell 11 percent, the peso lost as much as 70 percent of its value and inflation accelerated to 41 percent. In the crisis that began in 2001, the nation went through five presidents in two weeks, restricted bank withdrawals and converted dollar accounts into pesos.

While a default is likely to extend Argentina’s 13-year absence from capital markets and could halvereserves from their current level of $29 billion, the government may be able to access credit from other sources, said Levy-Yeyati. Argentina and China’s central banks agreed July 18 to a currency swap equivalent to $11 billion that Cabinet Chief Jorge Capitanich said could be used to stabilize reserves.

Fernandez will probably have to respond to a default by devaluing a second time this year, raising interest rates and crimping imports to halt capital flight, said Marina Dal Poggetto, an economist at Estudio Bein, a Buenos Aires-based economic consultancy and research firm.

Approaching Deadline

Economy Ministry spokeswoman Jesica Rey didn’t immediately reply to requests for comment on the impact of a possible default. Stephen Spruiell, a spokesman for Elliott, also declined to comment on how a default will affect its attempt to collect on the ruling.

While the cost to protect Argentina against non-payment with credit-default swaps is the highest in the world, the nation’s dollar bonds due 2033 have traded between 81 and 92 cents on the dollar this month on speculation the government will find a way to pay bondholders and skirt the ruling.

Argentine debt has returned 2.1 percent in July compared with an average return of 0.7 percent for emerging market debt, according to JPMorgan Chase & Co. The 2033 notes fell 1.1 cent to 82.75 cents on the dollar at 4:20 p.m. in Buenos Aires.

Government officials have met five times with a court-appointed mediator and have shunned direct talks with the hedge funds as the nation seeks a delay on the ruling until the end of the year. That is when the Rights Upon Future Offers clause, or RUFO, which could trigger payments to other bondholders, expires. A delegation is meeting with Daniel Pollack, the mediator, today in New York.

‘Rather Gamble’

“The simple fact is that Argentina’s leaders have had no interest in negotiating -- not now, and not during the two and one-half years a stay was in place,” Aurelius, a litigant in the case against Argentina, said in an e-mailed statement July 22. “They would rather gamble with the livelihoods of the Argentine people than sit down and reach a deal.”

Those warnings have had little impact in Argentina. Diego Korenwaser, 30, said a default may even be beneficial for the store he runs in Buenos Aires with his mother selling leather coats and bags since a weaker peso would encourage more of the tourism upon which the business depends.

“I don’t think it will change much,” Korenwaser said. “There might be a few protests but I don’t think it will go beyond that.”

Government Support

About 47 percent of Argentines supported the government’s stance on the holdout debt crisis in July, up from 38 percent the month before, according to a poll by Poliarquia. The survey of 1,400 people had a margin of error of 2.67 percent.

Fernando Koning, who owns a barbershop in Buenos Aires, said Argentines have seen it all before and have already taken measures to protect themselves against another debt crisis. The South American nation has defaulted on its debt seven times since independence from Spain in 1816.

“People aren’t worried by a default - we’ve already seen this 50 times,” Koning said. “The dollars that I had in Buenos Aires, I already took them to Montevideo,” he said, referring to the Uruguayan capital. “I already had my money taken once so I learned the lesson that you have to take precautions.”

 

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Para la consultora Elypsis, el Gobierno irá por una “salida negociada” con los holdouts