UPDATE 3-Argentina to argue debt repayments immune to U.S. law

Fri Nov 16, 2012 3:42pm EST

* Gov't says debt repayments made outside United States

* Holdout ruling raises "technical default" fears

* Argentine president vows not to pay "vulture funds"

By Alejandro Lifschitz and Daniel Bases

BUENOS AIRES/NEW YORK, Nov 16 (Reuters) - Argentina's government will tell a U.S. judge on Friday that sovereign debt repayments are made outside the United States, making them immune to U.S. law and seizures by holdout bondholders, the South American country's state news agency reported.

Argentina is fighting an October ruling by a U.S. federal appeals court that would force the government to pay holdout creditors owning bonds that have been in default since 2002. It is due to present papers by midnight.

The U.S. 2nd Circuit Court of Appeals in New York last month ruled that Argentina discriminated against bondholders who refused to take part in two debt restructurings as the nation tried to recover from a $100 billion default a decade ago.

The ruling sparked fears that U.S. courts could inhibit debt payments to creditors who accepted terms of the restructuring, out of consideration for investors who rejected Argentina's terms at the time. This would trigger a technical default.

The appeals court, however, referred the case back to the U.S. District Court to address the technical questions of just how debt payments would be calculated and how to treat the involvement of third-party banks such as Bank of New York Mellon, which act as transfer agents for money owned exchange bondholders.

Argentine President Cristina Fernandez said recently that her country will not pay "one dollar to the vulture funds," her term for the holdout investors who buy distressed or defaulted debt and then sue in international courts to get paid in full. Fernandez has vowed to keep making payments to other creditors.

State news agency Telam said the government would argue that the repayments were "immune to U.S. law" because "the payment of creditors is conducted outside that country."

"When the money arrives in New York, it already belongs to the creditors, not to Argentina," it quoted an unnamed official source as saying.

Argentine bonds closed up 1 percent on average in over-the-counter trade in Buenos Aires on Friday, after accumulating a loss of 4.1 percent in the previous three sessions.

"The move by Argentina put a floor under debt prices, because if it works it could create a buying opportunity," said Ruben Pascuali, a trader at local brokerage Mayoral Bursatil.

Bank of New York Mellon, which transfers funds from the Argentine government to the country's bond holders, is expected file a statement on its position to U.S. District Court Judge Thomas Griesa on Friday, a source familiar with the bank's thinking on the matter told Reuters.

The bank is going to argue it is not an agent of Argentina but rather a "duty bound" indentured trustee there to enforce the rights of investors who exchanged their bonds in 2005 and 2010, the source said.

The bank wants the lower court's order from Griesa, which currently has all payments halted, to remain in place until the full appeals process has run its course, the source said.

That means after Griesa addresses the two technical questions set by the appeals court, BNY Mellon wants him to keep the payments frozen until the 2nd Circuit reviews and rules on his logic.

The deadline for parties to present their positions to Griesa is Friday at 11:59 p.m. EST (0459 GMT, Saturday). The judge is expected to make a speedy response given Argentina is due to start making $3.3 billion worth of payments to exchange bondholders starting Dec. 2. Griesa's ruling will automatically return to the appeals court for review.

In a court filing this week, Elliott Management Corp's NML Capital Ltd and two Aurelius Capital Management funds urged Griesa to lift his Feb. 23 stay on payments pending appeal.

October's ruling by the appeals court largely upheld injunctions issued in February by Griesa in favor of the holdouts, which own approximately $1.4 billion of defaulted debt.

The holdouts warned in their argument to Griesa that terms of the swapped Argentine bonds may allow the country to circumvent the United States by using subsidiaries in London and Luxembourg to make debt payments.

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