UPDATE 2-Argentina flirts with debt swap as fear of default rises

Tue Jun 17, 2014 8:29pm EDT

(Adds quotes from Kicillof, analyst)

By Sarah Marsh and Alexandra Ulmer

BUENOS AIRES, June 17 (Reuters) - Argentina is taking steps to place its restructured debt under local law so it can continue making payments despite a string of adverse U.S. court rulings, Economy Minister Axel Kicillof said on Tuesday as fears of default increased.

Under the move, Argentina would swap bonds that are governed by U.S. law for those governed by Argentine law, meaning they would no longer be subject to the U.S. courts.

"We cannot allow (holdouts) to prevent us from honoring our commitments to creditors," Kicillof told a news conference. "For this reason we are starting the steps to start a debt swap to pay them in Argentina under Argentine law."

The U.S. Supreme Court declined on Monday to hear an appeal by Argentina in its decade-long battle against hedge funds who refused to take part in its debt restructuring after its catastrophic 2001-02 default.

This left a lower court ruling intact ordering it to pay them $1.33 billion, something Argentina has vowed not to do.

It also set the clock ticking ahead of June 30, when the government is due to service restructured bonds. If a resolution is not found before then, Argentina would be barred by the U.S. court decision from making the payment, pushing the country into technical default 12 years after its devastating debt crisis.

Analysts said a new swap into locally governed bonds was a risky move that could also result in a technical default if Argentina did not manage to implement it before the end of the month or in the likely event that some investors refuse it.

"Essentially he's saying Argentina is going to ignore the ruling," said Ignacio Labaqui, analyst for consultancy Medley Global. "This is a fairly risky move ... Still, they haven't closed the door to negotiations."

Kicillof said Argentina would also get its lawyers to speak with U.S. District Judge Thomas Griesa, in a last-ditch attempt to negotiate a solution to its dispute with hedge funds.

If Argentina complied with his ruling, this would open the door to claims from other holdout bondholders worth $15 billion that the country could not afford, Kicillof said,

"We are going to take the measures needed to be able to pay," Kicillof told a news conference. "But we will also send our lawyers to talk to Judge Griesa to see what he is referring to when he says he isn't pushing Argentina into a default with this ruling."

Kicillof said Argentina had shown it wanted to normalize relations with foreign creditors and investors but would not accept "just any conditions."

"Some say you have to negotiate with the vultures. But... vultures are vultures because they do not negotiate, because they go to the courts to obtain the total of their claims."

Last month, Argentina's lawyers sought to assure Griesa it would not evade his orders if the U.S. top court declined to hear its case. Kicillof's comments on Tuesday suggested a tougher stance.

(Additional reporting by Hugh Bronstein and Eliana Raszewski; Editing by James Dalgleish and Cynthia Osterman)