UPDATE 1-South American leaders rally behind Argentina over debt

Tue Jul 29, 2014 8:41pm EDT

(Adds official communique paragraphs 14-15)

By Diego Ore and Deisy Buitrago

CARACAS, July 29 (Reuters) - South American leaders have rallied behind Argentine President Cristina Fernandez, who is locked in a legal battle with holdout investors that could trigger a debt default this week.

The standoff figured prominently at the Mercosur bloc's meeting in Caracas on Tuesday, with heads of state castigating the holdouts as speculators menacing the entire region.

Argentina has until late Wednesday to either pay out or reach a deal with the hedge funds that are suing for full payment on their bonds to avert a second default in little over a decade in Latin America's No. 3 economy.

While Fernandez was in Venezuela on Tuesday, Argentine debt negotiators met in New York with a court-appointed mediator for last-gasp negotiations to cut a deal.

"We have ratified all our militant solidarity with the Republic of Argentina, with the struggle the president is leading against the attempt, through so-called vulture funds, to cause damage via financial speculation," Venezuela President Nicolas Maduro told the forum.

"It's not just damage to Argentina. It's damage to all the countries of the south," added the socialist Maduro, who replaced Hugo Chavez after his death from cancer last year.

Regional heavyweight Brazil also backed Argentina.

"The problem that's affecting Argentina today is a threat not just to a brother nation. It affects the entire international financial system," President Dilma Rousseff said.

"We cannot accept that the actions of a few speculators put the stability of entire countries at risk. We need clear rules and a system that allows impartial forums, and allows for justice in the process of restructuring sovereign debt."

If the deadlock persists, U.S. District Judge Thomas Griesa will prevent Argentina from making the July 30 deadline for a coupon payment on exchanged bonds. A default would hurt Argentina, which is already in recession and grappling with dwindling foreign reserves and soaring inflation.

Argentina has been cut off from international credit markets since its 2002 default on $100 billion, which plunged millions of Argentines into poverty.

For many years, the country refused to negotiate with the holdouts who bought its distressed debt on the cheap, slamming them as "vultures" picking over the carcass of its default.

Fernandez defended Argentina's position extensively during the summit, accusing the holdouts of threatening the stability of the international financial system.

At the end of the summit, a formal Mercosur communique said Argentina could in no way be considered in default when it had funds to pay debt but was being legally blocked from doing so.

"The presidents reaffirmed their solidarity and unrestricted support for the Republic of Argentina regarding legal decisions favorable to a minority group of sovereign debt-holders who have rejected conditions accepted by the large majority," it said. (Writing by Andrew Cawthorne; Editing by Richard Lough, Andre Grenon and Richard Chang)

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