UPDATE 2-Argentina fails to reach breakthrough in debt mediator talks

Fri Jul 25, 2014 4:03pm EDT

By Daniel Bases and Alejandro Lifschitz

NEW YORK/BUENOS AIRES, July 25 (Reuters) - Argentina failed to reach a breakthrough with the U.S. court-appointed mediator in its battle with holdout creditors on Friday in talks that lasted just an hour, suggesting a settlement to avoid a default next week remains elusive.

The Argentine delegation headed home to seek instruction from the government after the talks in New York, mediator Daniel Pollack said, while the country's economy ministry underscored it would continue the dialogue with him over the next few days.

Earlier this week, U.S. District Judge Thomas Griesa ordered Argentina and holdout creditors who have rejected its debt restructurings to meet continuously with Pollack to try to reach a deal and avoid the country's second default in 12 years.

If they fail to reach a deal and holdouts do not ask for a suspension of Griesa's ruling to pay them back in full on their defaulted bonds, the judge will prevent Argentina from making a July 30 deadline for a payment on its exchanged bonds.

"No resolution of the impasse between the parties has been reached. Consistent with Judge Griesa's direction of earlier this week in open Court, I anticipate that there will be further communications with the parties prior to the Default date (July 30)," Pollack said.

News that the meeting was over so quickly sent Argentina's bonds reeling. Over-the-counter Discount bonds fell 5.6 percent by 1900 GMT while Par bonds slid 5 percent.

Pollack said the holdout hedge funds, who bought Argentine notes on the cheap after the country's 2002 $100 billion default and spurned the terms of its 2005 and 2010 restructuring deals, were not present at the meeting.

However he briefed them by telephone and they reiterated their "availability and willingness to meet with, and, indeed, with representatives of the Republic, at any time".

The government portrays the funds as "vultures" picking over the carcass of its default that sent millions of Argentines into poverty. It has refused to talk directly with them.

"The process of dialogue initiated with the mediator will continue in the next few days," the economy ministry said.

Griesa ordered in 2012 that Argentina pay the holdouts $1.33 billion plus accrued interest - a ruling Latin America's No. 3 economy says it cannot comply with

One of the lead holdouts, NML Capital Ltd, an affiliate of billionaire Paul Singer's Elliott Management Corp, said Argentina's government had made clear "that it will be choosing default next week."

Another default would pile more pain on an economy grappling with one of the highest rates of inflation in the world, an ailing currency and dwindling foreign reserves after a long banishment from global capital markets.

Economy Minister Axel Kicillof told finance officials from across South America that Argentina would negotiate but that any talks must be held under fair conditions.

He said Griesa's order was "unprecedented and impossible to fulfill."

Argentina has previously said it needs more time to reach a deal, in part because it worries that it risks running afoul of the so-called RUFO provision in the restructurings, that bars it from voluntarily offering better terms to investors than those it gave in the restructurings.

More than 90 percent of investors agreed to accept less than one-third the original value of their bonds in those swaps.

Argentina argues it would open itself up to challenges from creditors amounting to anywhere from $120 billion to $400 billion if it broke the RUFO. The clause expires on Dec. 31.

With just five days until the July 30 deadline, the odds of a default have sharply increased.

Earlier this year, Argentina unexpectedly struck a deal with Spanish oil major Repsol to compensate it for the nationalization of energy company YPF. It also reached an agreement with the Paris Club of creditor nations. (Additional Reporting by Sarah Marsh and Richard Lough in Buenos Aires; Editing by Steve Orlofsky and Andrew Hay)

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