Argentina on Thursday was declared in default on a $US539 million ($578 million) interest payment to bondholders, after the failure of last-ditch talks with another group of creditors who are holding out for full repayment of debt bought after the country’s record $US95 billion default in 2001.

The default was reported by ratings agency Standard & Poor’s after a second deadline to meet the payments expired. Argentina has the money, but a New York court in June ruled that it cannot pay any creditors until it meets its obligations in full to NML Capital, one of a group of hedge funds that have refused to renegotiate terms of debt picked up after the history-making sovereign default.

Argentina’s Economy Minister Axel Kicillof this week joined last-minute negotiations with the hedge fund aimed at an agreement that would unblock the payment. However, the talks broke up without resolution, meaning the money could not be released to holders of about $13 billion of discounted bonds.

At a hastily convened press conference in New York on Thursday morning (AEST), he rejected suggestions the country had entered default and said Argentina would continue to deny what he calls “vultures” full repayment. Full repayment to hold-out investors would cost the government between $US15 and $US20 billion, he said.

The government of Cristina Fernández de Kirchner is also concerned about contracts with exchange bondholders that prevent any creditor getting a better deal than those bondholders until a special clause expires at the end of this year.

The NML case wound its way through the United States courts until 2012, when a federal judge in Manhattan issued a ruling that said Argentina could not make payments to exchange bondholders without paying the hold-out investors.

Argentina appealed and took its case to the United States Supreme Court, which rejected the appeal in June. Argentina had until the end of July 30 to pay the hold-out investors or risk defaulting, after an initial 30-day grace period.

The country has been locked out of global capital markets for nearly 13 years, meaning Thursday’s default is unlikely to have much impact on emerging market sentiment. However, it is a heavy blow to Argentina’s efforts to repair its image amid its third recession in six years.

It had made giant strides this year in restoring investor confidence, agreeing a repayment schedule with the Paris Club of government creditors on about $US9.5 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.

Peter Hakim, the president emeritus of the Washington-based think tank Inter-American Dialogue, told Fairfax Media that Thursday’s default was “a costly shame”.

“Just a couple of months ago the Argentine government seemed to understand how dicey its economic situation was and began efforts to move from financial pariah to a more reliable international actor,” he said.

Argentina has rejected its default status, saying it was ready to pay the outstanding interest payments.

“People have created all kinds of euphemisms to describe this situation,” Mr Kicillof said. “But it can’t be a default if we’ve deposited the funds. We’ll continue to pay our debt.”

The government and its advisers are now likely to seek a concession on the overdue payment from holders of the restructured bonds. S&P’s said on Thursday this would trigger a review of the default status.

If the country is able to undo the default, “we could revise our ratings on Argentina depending on our assessment at that time of Argentina’s residual litigation risk, its access to international debt markets and its overall credit profile,” S&P said.