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US Judge Calls Argentina Debt-Swap Plan 'Illegal'

Carmine Boccuzzi, foreground left, a lawyer representing Argentina, leaves Federal court after a hearing, in New York, Aug. 21, 2014.
Carmine Boccuzzi, foreground left, a lawyer representing Argentina, leaves Federal court after a hearing, in New York, Aug. 21, 2014.
Reuters

U.S. District Judge Thomas Griesa on Thursday called Argentina's proposed debt restructuring plan “illegal” but stopped short of holding the country in contempt, saying that would not help resolve the dispute that led to the nation's second default in a dozen years.

Griesa said proposed legislation announced on Tuesday by President Cristina Fernandez would violate orders he imposed favoring creditors who refused to accept restructured bonds following the country's 2002 default on $100 billion in debt.

“It is illegal, and the court directs that it cannot be carried out,” Griesa said at a hearing in New York.

But the judge declined to hold Argentina in contempt despite the urging of the two leading holdout creditors, saying such a finding would not “add anything to the scales” to encourage a settlement.

Argentina missed a June interest payment after Griesa blocked payments owed to holders of debt issued under U.S. law that was restructured in 2005 and 2010.

Fernandez, steadfast in her refusal to pay the hedge funds face value on their bonds, this week sent to the Argentine Congress a bill that would allow her government to resume payment to holders of exchanged bonds in defiance of Griesa's court.

The proposal prompted lawyers for Elliott Management Corp's NML Capital Ltd. and Aurelius Capital Management, the leading bondholders suing for payment after not participating in the country's restructurings, to seek a contempt finding.

“I firmly believe there will not be a settlement until it becomes crystal clear to the Republic of Argentina that its efforts to evade will not be countenanced,” said Edward Friedman, a lawyer for Aurelius.

But Carmine Boccuzzi, a U.S. lawyer for Argentina who said his firm Cleary Gottlieb Steen & Hamilton only learned about the proposal Tuesday night, said a contempt order would not help forge a deal, adding the proposal was not even a law yet.

“A finding of contempt would be only further gasoline on the fire,” he said.

Typically, U.S. courts can impose prison or fines as part of a contempt order. With prison not an option, Argentina could face stiff fines for failing to comply with Griesa's orders, legal experts said.

They said even if Griesa were eventually to issue a contempt order, it would be unlikely to have much practical impact on a country that has already shown itself willing to defy his rulings.

“It's largely in the realm of the symbolic,” said Chimene Keitner, a law professor at the University of California in Hastings.

Griesa's finding that the legislation was a violation of his orders followed past rulings he had made when Argentine officials made similar proposals for debt swap proposals.

During the 2005 and 2010 restructurings, holders of about 93 percent of Argentina's debt agreed to swap their bonds in deals giving them 25 cents to 29 cents on the dollar. Bondholders who did not participate including NML and Aurelius then turned to the courts seeking payment in full.

In 2012, Griesa ordered Argentina to pay the holdouts $1.33 billion plus interest the next time it made a payment to holders of the exchanged bonds. A federal appeals court later upheld the ruling, and the U.S. Supreme Court declined to review it in June.

After the Supreme Court's decision, Griesa in June blocked a $539 million interest payment on the restructured debt deposited by Argentina at intermediary Bank of New York Mellon, saying it violated his order. Those funds are still held in limbo in BNY Mellon's account.

Latin America's number three economy then tipped into default on an estimated $29 billion in debt when negotiations with the New York hedge funds collapsed.

The president's bill would make state-controlled bank Banco Nacion the intermediary for bondholder payments instead of BNY. The legislation is likely to be enacted by Congress because Fernandez's backers hold a majority in both chambers.

Argentina has accused the judge of overstepping his bounds and siding with the holdouts and said any contempt charge would have no consequences for a sovereign power.

Argentina's discount bonds due 2033 were off 0.43 point in price to bid 80.29 points, with a yield of 11.06 percent, registering little movement on Griesa's decision. The Par notes maturing in 2038 were bid up 0.67 point in price to 49.35, yielding 8.97 percent, according to Thomson Reuters data.  

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