Argentina faces ‘shock’ if it defaults: Debt pro

Argentina could be back in the economic doldrums if it fails to strike a deal with its creditors and defaults on Wednesday, a key player in its 2010 debt restructuring told CNBC.

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Hans Humes, the founder of Greylock Capital Management, a hedge fund which invests in distressed emerging market debt, said the country was underestimating the impact of another default—its third in 28 years.

"There may be an underappreciation in Buenos Aires for the shock," he told CNBC on Tuesday, a day before the crucial end-of-July deadline.

Read More3rd time unlucky: Argentina set for new default

Humes and his fund participated in Argentina's debt restructuring of 2010, when most creditors agreed to a haircut of around 70 percent, following the country's massive $82 billion default—then the biggest-ever by a sovereign nation.

Latin America's third-biggest economy looks likely to default again this Wednesday, after refusing to comply with a U.S. legal ruling ordering it to repay $1.3 billion to so-called "holdout" creditors. These creditors—termed "vulture funds" by Argentina—snapped up junk bonds around the time of its 2001 default and refused to accept the debt restructurings that followed.

A young man passes by posters on a wall against the 'vulture funds' in Buenos Aires on June 18, 2014.
Alejandro Pagni | AFP | Getty Images
A young man passes by posters on a wall against the 'vulture funds' in Buenos Aires on June 18, 2014.

Argentina says it cannot afford to pay these creditors in full, because it would lead others to also demand full payment, even those that previously agreed to the debt haircuts.

However, Humes warned that default would hit Argentina's delicate economy, as well as those U.S. hedge funds which purchased the country's debt and now stand to lose millions.

"I think there is going to be an impact on the ground in Buenos Aires and maybe some reverberations in our markets as well. And there might be some impact on people who have been invested in Argentina as well, who may not have appreciated the risks of getting involved in an emerging market," he told CNBC.

Capital Economics sees Argentina's economy shrinking by 1 percent this year—much less than the near-11 percent contraction it suffered after the 2001 default.

"I think all the banks that are involved in Argentina may have to take a step back… And while the majority of the population seems to approve of not engaging with vulture funds, they may change their tune a little bit, after a few weeks or months of seeing what the real impact on the economy is," said Humes.

Last week, Olivier Blanchard, chief economist at the International Monetary Fund, said the economic cost to Argentina of defaulting again might be "substantial".

"If it goes into default and doesn't pay the holdouts, there might be substantial costs in being basically unable to access markets for some time," he said at a press conference in Mexico City.

However, other economists have argued Argentina has been unable to tap the capital markets ever since 2001, so a new default will make no difference.

"Argentine authorities seem to have reached the conclusion that to default now and renegotiate later would the less costly option," said IHS Country Risk Latin America Analyst Carlos Caicedo in a research note on Monday.

—By CNBC's Katy Barnato