Countries may want to think twice before threatening default.
As part of an appeal from a lower-court ruling, Argentina said it might not pay what it owes to longtime holders of its sovereign debt. But the U.S. Supreme Court announced Monday that it wouldn't overturn the lower-court's ruling.
The court separately said Monday that creditors can seek information about Argentina's non-U.S. assets, a permission hedge funds had pushed for in hopes of proving the country actually had the means to pay off on its bonds.
Traders reacted to the news by further driving up the cost for Argentina to borrow money in international markets. The price of existing bonds fell along with a rise in their yield. And the cost of buying five-year credit default swaps—the cost of insuring against the default—rose nearly 60 percent Monday.
"Sovereign nations are now more like all other debtors and not immune from rulings abroad, like the U.S. Supreme Court. It is much harder for them to have a financial life outside their borders without getting hassled at every step," said Anna Gelpern, a Georgetown Law professor and fellow at the Peterson Institute for International Economics. "The important point for other countries is that they can no longer credibly threaten default without being shut out of the global financial markets."
The most prominent hedge fund involved in the situation, Paul Singer's Elliott Management, was pleased by the Supreme Court's decision.
"America's highest court has spoken. Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina's economy and its international standing," a spokesman for Elliott unit NML said in a statement Monday.
Spokesmen for Aurelius Capital Management and Gramercy Funds Management—the two other most prominent hedge funds involved in the situation—declined to comment.
Elliott and Aurelius are so-called "hold-out" bond holders that did not accept new terms of restructured debt following Argentina's default in 2001. Gramercy is reportedly one of many owners of the restructured debt, putting it at odds with the hold-outs over if and how much to pay whom.
From an American perspective, the Argentine appeal for leniency is over.
"The Supreme Court essentially just told Argentina, 'enough already.' As far as the American courts are concerned, Argentina has to pay, period," Gelpern said.
Still, she noted it was possible that Argentina would still decide not to pay.
"It's plausible Argentina will default. It's really just a question of domestic politics," Gelpern added. "The problem is creditors like Elliott and others can't just grab their stuff and instead have to apply financial market pressure."
—By CNBC's Lawrence Delevingne