UPDATE 3-Argentina wants a single deal with all holdout investors

Wed Aug 27, 2014 5:31pm EDT

(Adds approval of bill by Senate committee)

By Alejandro Lifschitz

BUENOS AIRES Aug 27 (Reuters) - Argentina's government on Wednesday ruled out further piecemeal debt talks with a small group of U.S. hedge funds and said it needed to strike a single deal with all bondholders that have rejected past restructuring agreements.

Latin America's No. 3 economy fell into default again last month after failing to reach an agreement with a group of holdout funds led by NML Capital Ltd and Aurelius Capital Management, which are suing for full payment on their bonds.

Other funds that have also rejected bond swaps that followed Argentina's record default in 2002 lurk on the sidelines and could launch similar lawsuits.

"We have to negotiate with everyone," Economy Minister Axel Kicillof told a group of congressional committees on Wednesday.

A deal is now not seen likely before next year's October presidential election, in which Fernandez cannot run.

Analysts say the dearth of dollars flowing into Argentina's economy will stretch already-sapped foreign reserves and intensify pressure on a peso that has been hitting one record low after another.

The local currency shed 1.5 percent on the black market on Wednesday to plumb an all-time low of 14.400 as central bank reserves fell to $28.5 billion.

On Wednesday, Congress began debating a bill designed to sidestep a U.S. court ruling banning Argentina from servicing performing debt until it pays the litigating funds $1.3 billion plus interest.

"The main aim of the draft bill is to show that Argentina can pay its debt and wants to pay its debt," senior government official Carlos Zannini told the hearing.

After a spirited debate in which opposition senators criticized the government's handling of the debt situation, the bill was approved by committee and sent to the Senate plenary for a vote expected next Wednesday.

SCANT HOPE FOR DEAL

Kicillof's comments poured cold water on already dim hopes the government might resume talks with NML and Aurelius in early 2015 following the expiration of a legal clause preventing Argentina from paying holdout investors on better terms than those obtained by investors that accepted restructuring agreements in 2005 and 2010.

Investor optimism for a deal suffered a blow last week when President Cristina Fernandez announced plans to make debt payments locally and to push bondholders to bring their debt under Argentine law.

Zannini said the long-term plan was to bring all of Argentina's sovereign debt under Argentine law.

Erratic policymaking, which saw interest rates cut last week and then raised this week, has highlighted tensions between the pro-expansion Kicillof and the country's central bank, which is presiding over one of the world's highest inflation rates.

"It is unclear that they are ready to make the adjustments needed to meaningfully control fx pressures," said Daniel Kerner, director of Latin America at Eurasia Group.

Fernandez's stance against funds that she denounces as "vultures" has won wide support among Argentines, but a second national strike scheduled on Thursday underscores a growing risk of social unrest. (Additional reporting and writing by Richard Lough and Hugh Bronstein; Editing by Chizu Nomiyama, Jonathan Oatis and Leslie Adler)