US court ruling closes avenue for Argentine debt payments

A US judge prohibited Citibank from handling payments on Argentine bonds issued under Argentine law Thursday, adding a new challenge in the country's bitter debt fight with US hedge funds.

US District Judge Thomas Griesa in New York rejected the bank's request to process the payments, saying they would violate his ruling last year that Argentina must first pay off hedge funds on the bonds they hold before it can pay other creditors.

The decision marks a fresh setback for Buenos Aires in its long-running US legal battle against NML Capital and Aurelius Capital Management, the bondholders it labels "vultures" seeking to capitalize on its 2001 default.

Citibank and Argentina had argued that the exchange bonds issued under Argentine law, and Citigroup's Argentina subsidiary, did not fall under the US court's ruling in the hedge fund case, and so the bank should be able to process the funds to the bondholders.

The US bank also said its role as simply a processor of the payments should not make it subject to the court's injunction against bond payments.

Griesa rejected both arguments.

He said that the hedge fund case ruling applied to payments made on any external debt, and that the Argentine-law bonds, denominated in US dollars and sold to foreign creditors, amount to external debt even if issued inside the country.

"Since the exchange bonds at issue here are denominated in dollars, they qualify as 'external indebtedness' of the republic," Griesa said.

And he ruled that any party aiding Argentina to make payments, including Citi, could be held in contempt for doing so.

Griesa rejected a third Citibank argument, based on the principal of comity, that the court should recognize that Argentine law demands that Citi process the payments.

- Argentina pressed to settle -

Griesa, who has been clearly frustrated by the failure of the two sides to reach a settlement, suggested that Argentina must give way.

"If Citibank's predicament is a matter of comity, it is only because the republic has refused to observe the judgments of the court to whose jurisdiction it acceded," he said.

Citi was allowed to make two payments on the Argentine law exchange bonds, in September and December, pending a final ruling on the issue.

Thursday's ruling blocks the next payment on the bonds, scheduled for March 30.

That effectively freezes another avenue for the country to satisfy the creditors it recognizes while refusing to pay NML and Aurelius.

The hedge funds refused to join in the 2005 and 2010 restructuring of some $100 billion in debt on which it defaulted in 2001.

The majority of creditors took steep writedowns of the value of their bonds, accepting "exchange bonds" in the process.

But NML and Aurelius, after having bought up Argentina's debt cheaply on the market, have held out for full payment of $1.3 billion plus accrued interest.

Argentina argued that paying them off would be unfair to exchange bond holders, and risked undermining the entire debt restructuring for the claims of a handful of "holdouts".

Nevertheless, in 2012 Griesa ruled in the hedge funds' favor, and ordered, in a ruling upheld in several appeals, that the country cannot make any other payments on the exchange bonds before it pays the hedge funds.

That forced Argentina into a new default in July, even though it attempted to make payments to the exchange bondholders.

In July, Griesa appointed a "special master" mediator to help fashion a settlement between the two sides, but talks so far have failed. Both Griesa and the mediators have accused Buenos Aires of refusing to negotiate.

"The court has long urged the Republic to participate in negotiating a resolution to the claims in this case," Griesa said in Thursday's ruling.

"The court urges the republic, once again, to avail itself of the special master's services."

A spokesman for NML Capital cheered Griesa's decision.

"The court's ruling makes clear that any third party that attempts to help Argentina in the payment process is in violation of the court's injunction," he said.

"Argentina should discontinue its defiance of courts and negotiate a resolution to this dispute."