WASHINGTON/BUENOS AIRES (Reuters) - 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, an unexpected move that risks toppling Latin America’s No 3 economy into a new default.

Argentine stockbrokers work on the floor of the Buenos Aires Stock Exchange June 16, 2014. REUTERS/Enrique Marcarian

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.

This could open the door to claims from other holdouts worth as much as $15 billion, a hefty sum for a slowing economy struggling with rapidly dwindling foreign reserves.

The news triggered a nosedive in Argentine stocks and bonds after investors expected the court to delay its decision and give Argentina time to negotiate with holdouts or restructure its exchange bonds outside of New York legislation.

The impact on global markets was muted given the country’s economic isolation since its default.

Argentina has previously refused to pay up. It argues it does not have the funds and cannot give holdouts preferential treatment over exchange bondholders after many of them bought the debt at a massive discount and are claiming payback in full.

If it sticks to that position, U.S. District Judge Thomas Griesa could prevent full payment to exchange bondholders even though the country is able and willing to pay them.

This could result in a default by June 30, when payments are due on discount bonds governed by New York, further setting back Argentina’s return to international capital markets.

“It’s a very damaging scenario for Argentina,” said Marco Lavagna at Ecolatina consultancy, noting that how lower courts implemented their rulings was key. “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 December 31 of this year when a clause in its debt swaps prohibiting it from offering holdouts better terms expires.

Whether Argentina can keep stalling investors and U.S. courts until that date remains to be seen.

Argentine stocks .MERV were down 7.3 percent by 1730 GMT, while the U.S. dollar-denominated benchmark 2033 Discount bonds ARGGLB33=RR fell 7.86 points in price to bid 75.010. Siobhan Morden, New York-based head of Latin American strategy at Jefferies LLC, said the market reaction was relatively mild as investors waited to see how the government would respond.

The government was not immediately available for comment on Monday but state-run news agency Telam said President Cristina Fernandez would deliver a televised address on Monday night.

The decision comes at an unfortunate time for Argentina which has been trying to normalize relations with foreign investors and creditors in order to regain access to international funds.

A DOUBLE BLOW

Argentina wants to avoid making full payment to holdouts led by hedge funds Aurelius Capital Management and NML Capital Ltd, a unit of billionaire Paul Singer’s Elliott Management Corp, that Fernandez has slated as “vultures”.

Creditors holding about 93 percent of Argentina’s bonds agreed to participate in the two debt swaps in 2005 and 2010, accepting between 25 and 29 cents on the dollar.

Some groups such as the IMF, the Washington-based global lender, have said they are worried a ruling against Argentina will make it more difficult for other countries to restructure their debt and put financial calamity behind them.

“This is surprising because it is giving a precedent for any ‘vulture fund’ to go against any country, so any country is vulnerable in a restructure,” said Sebastian Centurion at ABC Exchange.

Others say collective action clauses that are now broadly used now in sovereign debt issuance should prevent Argentina’s particular case becoming a precedent. Emerging markets did not react to the news of the Supreme Court decision.

In a double blow to Argentina on Monday, the U.S. Supreme Court also ruled that creditors can seek information about Argentina’s non-U.S. assets in a case about bank subpoenas that is part of the country’s decade-long litigation with holdouts.

The question was whether NML could enforce subpoenas against Bank of America and Banco de la Nacion Argentina. The court’s ruling may nonetheless have limited impact in part because of Argentina’s limited assets around the world.

NML has in the past pursued Argentine assets aggressively in its fight to get full repayment for its bonds, in 2012 even seizing an Argentine navy ship in Ghana.

On the issue of paying bondholders, Argentina had said in its most recent court filing that the government would struggle to pay the bondholders in full while also serving its restructured debt.

In that scenario, “Argentina will have to face, objectively, a serious and imminent risk of default,” the filing said.

The bondholders dispute that assessment, saying in their own court filing there was evidence presented in lower courts that Argentina could afford to pay.

“We are reviewing the decisions from the Supreme Court today and what the next steps might be, but we have no other comment at this time,” a spokesman for NML told Reuters.