Second default in 13 years pushes peso down more than 4% against the dollar, with fallout likely to drive inflation higher

Argentina's government was in a defiant mood on Thursday after defaulting on its debt for the second time in 13 years.

Economy minister Axel Kicillof, speaking after 11th hour talks with bondholders in New York failed to avert a default, played down the impact it would have on the country's citizens. "We're not going to sign an agreement that jeopardises the future of all Argentinians," he told a press conference in New York. "Argentinians can remain calm because tomorrow will just be another day and the world will keep on spinning."

Markets appeared to disagree, with Argentina's Merval share index falling almost 7% on Thursday and the peso down more than 4% against the dollar. Analysts said a fall in Argentina's currency would cause further pain in the country, pushing up the price of imports and driving inflation higher.

Steen Jakobsen, chief economist at Saxo Bank, said the fallout would be difficult for a country where inflation is already 12% on official measures and 40% unofficially. "At a minimum we'll see a loss of GDP of at least 1% if not 2%," he said.

Argentina was already locked out of international capital markets following its earlier default in late 2001, and Neil Shearing, chief emerging markets economist at Capital Economics, said the latest default would be viewed as a local issue: "Confirmation that Argentina has officially fallen into default is likely to rattle local markets and has the potential to do significant damage to the domestic economy. But we suspect that contagion to other emerging markets is likely to be limited."

Argentina has been locked in a decade-long dispute with hold-out investors that the government has described as "vulture funds" – a group of US hedge funds led by billionaire Paul Singer's NML Capital, an affiliate of Elliott Management. The vast majority of Argentina's bondholders agreed to debt restructuring deals in 2005 and 2010 following its 2001 default, wiping off more than 70% of the value of their investment but securing regular interest payments. But the holdout investors refused the restructuring and are demanding repayment in full.

An instalment of $539m (£319m) was due on the country's restructured bonds on 30 June, which Argentina wanted to pay. The move was blocked, however, by a US judge, Thomas Griesa, who ruled Argentina could not pay the restructured bonds back unless it also paid more than $1.5bn to the holdout investors. Argentina has insisted it cannot afford to do both. A 30-day grace period expired on Wednesday at midnight New York time, meaning Argentina technically defaulted on the restructured bonds.

More than 120 economists called on the US Congress to intervene, warning in a letter that Griesa's decision to uphold the holdout investors claim could cause "unnecessary economic damage to the international financial system, as well as to US economic interests".

In Argentina, the government said the country was the victim of a conspiracy of international financial agents.

"To say we are in default is absurd trickery," said cabinet chief minister Jorge Capitanich. "If the judge is clearly an agent of the vulture funds, if the mediator is an agent of the vulture funds, if the judicial system is infiltrated by the vulture funds, then what kind of justice are you talking to me about?"

Capitanich blamed the US government for failing to intervene against the "obscene profits" awarded to hedge funds by the New York court. "Here there is a responsibility of the United States to generate the conditions for unrestricted respect for the sovereignty of nations. This is Argentina's position, a rational position," Capitanich said.

Later, after returning from New York, Kicillof said he is willing to hold further talks with holdout investors whose claim for bond payments forced the South American country into default.

It was unclear how the situation would be resolved, but Griesa said he would hold a hearing on the case on Friday.

There was also speculation that JP Morgan is considering the possibility of buying the holdout bonds. A spokeswoman for the bank declined to comment.

News that the late-stage talks had failed was broken by Daniel Pollack, a US court-appointed mediator in the tense negotiations. "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default," he said. "The full consequences of default are not predictable, but they certainly are not positive."

Stressing the severity of the situation, he added in a statement: "Default is not a mere "technical" condition, but rather a real and painful event that will hurt real people: these include all ordinary Argentine citizens, the exchange bondholders (who will not receive their interest) and the holdouts (who will not receive payment of the judgments they obtained in court)."

Opposition leaders in Argentina scoffed at the government's attempt to deny the country had entered into default. "It doesn't matter what we say, the world understands we have fallen into default," said Rogelio Frigerio of the PRO conservative party and head of the Buenos Aires city bank Banco Ciudad.

In the conservative daily La Nación, columinst Joaquín Morales Solá questioned the wisdom of president Cristina Fernández de Kirchner's tactic of denial. "The government's attitude is unexplainable," the columnist wrote.

• This article was amended on 5 August 2014 to clarify that a letter to the US Congress was not from the Centre for Economic and Policy Research.