(Updates peso level, adds details about debt swap bill)
By Hugh Bronstein and Alejandro Lifschitz
BUENOS AIRES Aug 20 (Reuters) - Argentina's new plan to skirt U.S. courts and resume payment on defaulted bonds aims to protect creditors who participated in two debt restructurings, the economy minister said on Wednesday as the local peso currency weakened to a new historic low.
Defying a U.S. federal court order, Axel Kicillof also said it would be "madness" to pay holdout creditors the 100 cents on the dollar that they were awarded in 2012.
The government has sent a bill to Congress that would replace its New York intermediary bank with state-run Banco Nacion, the latest move in a years-old legal chess game between Argentina and its "holdout" creditors who refused to participate in the restructuring.
Argentina's black market peso reeled on the news, falling 2.0 percent to an all-time low 13.5 to the U.S. dollar. The country's benchmark dollar-denominated bonds due in 2033 slumped more than 2.0 percent in price.
The legal deadlock is squeezing Argentina's foreign reserves and the availability of dollars in the market by preventing the economically ailing country from issuing international bonds.
Last month, Argentina defaulted on an estimated $29 billion of its restructured debt after a New York court blocked an interest payment of $539 million. The payment did not go through to investors because U.S. District Judge Thomas Griesa says restructured bonds cannot be paid unless the holdouts are simultaneously paid 100 cents on the dollar, plus interest.
The $539 million deposited by Argentina remains with intermediary Bank of New York Mellon. Argentina says Griesa overstepped his bounds by blocking the coupon payment, and is moving to ensure future payments go through local banks out of Griesa's reach.
On Tuesday evening, President Cristina Fernandez announced her intention to replace Bank of New York Mellon with state-run Banco Nacion as intermediary. She also offered to swap bonds governed by U.S. law for debt under local jurisdiction.
Kicillof told reporters the proposed swap would neither break existing bond contracts nor be obligatory.
"Argentina is going to continue paying its debts," Kicillof said, mentioning a $200 million payment due on Sept. 30 on restructured Par bonds denominated in dollars. "Argentina will preserve its debt restructurings."
But to pay the holdouts 100 cents on the dollar, in accordance with U.S. court rulings, would be "financial madness", he said.
The debt swap bill is set to start being debated in the Fernandez-controlled Senate next week. In presenting the idea to the public on Tuesday she gave no hint of how many bond holders would have to participate in the swap for it to be activated.
On international markets, the price on Argentina's widely traded and dollar-denominated Discount bond maturing in 2033 fell 2.31 percent to bid 80.513, with a nominal yield of 11.024 percent.
The case goes back to Argentina's 2002 default on about $100 billion in sovereign bonds. The vast majority of holders participated in restructurings in 2005 and 2010, which offered less than 30 cents on the dollar on the defaulted debt.
A group of hedge funds led by Elliott Management Corp and Aurelius Capital Ltd. opted to sue in the U.S. federal courts, which govern the original bond contracts, for 100 cents on the dollar.
Fernandez and her ministers characterize the funds "vultures" who bought Argentine bonds at steep discounts and are out to wreck the country's finances in their pursuit of astronomical profits.
"They have created conditions of anarchy and the destruction of the rule of law, all so they tenaciously attack countries that do not accept the conditions that they impose," Cabinet chief Jorge Capitanich said.
(Additional reporting by Richard Lough and Walter Bianchi; Editing by W Simon and Clive McKeef)