A July 30 deadline – following a 30-day grace period – is linked to a New York court decision in June that stops the country paying all its creditors if it does not honour $US1.3 billion in commitments to US hedge fund NML Capital, which has held out for full repayment.

The government of Cristina Fernández de Kirchner is also worried about contracts with exchange bondholders that prevent anyone getting a better deal than them until a special clause expires at the end of this year, as well as the risk of setting a precedent for all hold-out investors if it pays NML Capital.

Some sort of negotiated settlement, or a stay on the original court ruling, looked likely on Wednesday (AEST), with Argentina’s economy minister Axel Kicillof joining last-minute negotiations with the hedge fund commonly referred to as buitres, or vultures. Even still, memories of the tumultuous collapse of the country nearly 13 years ago still haunt the process.

The lead-up to that default was often referred to by commentators as like watching a train wreck in slow motion. After much-lauded economic reforms in the 1990s – during which the government of Carlos Menem privatised state assets, gave more autonomy to the central bank and pegged the volatile Argentine peso at parity to the US dollar – the country started to lose its way because of capital flight, waste and the lose of export competitiveness.

A huge blow was currency devaluation in neighbouring Brazil, both a trading partner and export competitor, amid the broader emerging markets crisis of the late-1990s.

As export income and revenue declined, Argentina slid into a protracted recession. Unsustainable deficits opened up in both the current account and fiscal balance, forcing the country to return constantly to tap global debt markets demanding ever-higher premiums and, finally, reach for a lifeline from the International Monetary Fund and World Bank.

The country slowly unravelled. Cash-starved provinces and municipalities began paying employees and suppliers in bespoke pseudo-currencies, while the normally safe, elegant boulevards of Buenos Aires and other cities became dystopian infernos with barred-up banks, regular rioting and soaring street crime rates.

A public increasingly battered by surging unemployment and civil unrest and fearing for the value of its savings began a run on the banking system, draining out 20 per cent of total deposits in seven months in 2001. The country’s risk spread, meanwhile, widened out to 2000 basis points over US Treasuries, making debt refinancing or new issues impossibly expensive.

The government imposed a series of capital controls to stop the bank run, while a succession of finance ministers came up with increasingly convoluted measures to try to kick-start the economy, including a de facto devaluation for some exporters.

The widening economic crisis took its toll on a political class known for its pork-barrelling, ad-hoc fiscal fixes and institutionalised corruption. As the country skidded through devaluation and default, it swore in no fewer than four presidents – interim and supposedly permanent – in five months.

Although painful for creditors and Argentinians alike, the inevitable default and currency devaluation worked – at least in the short term. By the end of 2002, the economy was growing again, unemployment was falling, exports were picking up and the country had started negotiations with its myriad creditors.

The cost of recovery, however, has been high inflation and an unstable currency, while the default has all but locked the country and its agencies out of global debt markets for the past 12 years. Despite periods of strong growth, Argentina remains vulnerable to commodity prices swings and capital flight, and the populist policies and fiscal mismanagement of the government has done little to inspire businesses or attract inward investment, according to economists.

Lorenzo Bernaldo de Quirós, a Spanish economist, says the country is careening towards another full-blown crisis.

“Default is a tale of an event foretold when it comes to Argentina,” he said.

“The macroeconomic situation and the government’s terrible economic mismanagement are driving the country towards bankruptcy yet again.”

Dwindling foreign currency reserves this year forced Argentina to devalue the peso by nearly 30 per cent to stem internal demand for hard currency.

The country is now on the cusp of its third recession in six years.

According to analysts, sorting out this latest, largely legal, mess with creditors matters to get Argentina’s economic recovery back on track and shake off its pariah state reputation.

Despite its current problems, the Argentine economy is much healthier than in 2001, and its external debt burden much lower, thanks mainly to concessions from creditors in post-default negotiations. According to the government, debt as a percentage of gross domestic product has declined from 166 per cent in 2002 to 44 per cent last year, with public external debt at 13 per cent.

The latest impasse in New York is just the newest instalment in a decade of negotiations with hold-out creditors and other debt-holders.

A default would have little impact on emerging market sentiment, given Argentina’s isolation from the global investment community. The hold-out saga has actually being pushing up the price of legacy dollar-denominated bonds on bets that the country would be forced to accelerate payment on some classes of debt. Argentina’s debt insurance costs hit six-week highs as default still looked likely on Tuesday.

The country has already made giant strides in restoring investor confidence, this year agreeing a repayment schedule with the Paris Club of government creditors on about US$9.5 billion of debt racked up before the 2001 default and resolving a two-year-old dispute with Repsol over its expropriation of the Spanish energy group’s 51 per cent stake in Argentine oil and gas company YPF.

With these two issues settled, Buenos Aires is keen to attract direct foreign investment to new shale-oil and gas projects in the west of the country.

Before joining this week’s talks in New York, Minister Kicillof had this year made presentations at the United Nations and the Organisation of American States, vowing to pay 100 per cent of its bondholders.

This week the government again sought to assure Argentinians that even if it came to default, it would be business as usual on the streets of Buenos Aires.

“There will continue to be economic activity regardless of any eventual technical fault,” cabinet spokesman Jorge Capitanich said.