The U.S. Supreme Court declined on Monday to hear Argentina's appeal over its battle with hedge funds that refused to take part in its debt restructurings, a move that risks send Latin America's No. 3 economy into a fresh sovereign default.
The high court left intact lower court rulings that ordered Argentina to pay $1.33 billion to the so-called holdouts who refused 2005 and 2010 debt swaps in the wake of its catastrophic 2001-02 default on $100 billion.
Argentina has previously refused to pay up. If it sticks to that position, U.S. authorities could prevent full payment to creditors holding restructured bonds even though the country is able and willing to pay them.
Read MoreArgentina stresses commitment to servicing debt
This could result in a default as early as June 30, when payments are due on discount bonds governed by New York.
Argentina's country risk, as measured by the J.P. Morgan EMBI+ Index, rose nearly 10 basis points on the news, while Argentine stocks were down nearly 4 percent.
Investors had not expected the adverse decision from the court.
"It's a very damaging scenario for Argentina," said Marco Lavagna at Ecolatina consultancy, noting that how lower courts implemented their rulings was key.Read More
"Maybe something could open up there and allow for negotiation."
Argentina hinted last month it might consider negotiating with holdouts but could not do so until next year when a clause in its debt swaps prohibiting it from offering holdouts better terms expires.