(Adds details from finance secretary's trip to New York)
BUENOS AIRES, Sept 4 Argentina's Senate on Thursday passed a bill aimed at circumventing U.S. court decisions regarding its defaulted debt by changing payment jurisdiction, sending the proposal to the lower house Chamber of Deputies for final approval.
The chamber, like the Senate, is controlled by government allies who are expected to vote the bill into law. Debate in the lower chamber is set to start next week. The Senate vote approving the measure was 39 to 27.
President Cristina Fernandez wants to resume servicing sovereign bonds that were restructured after Argentina's previous default in 2002. Her government missed a coupon payment on its restructured bonds in July, thrusting the South American country into default.
The proposed law, which says that foreign debt can be paid through intermediaries outside the United States, is Fernandez's attempt at getting back on a paying basis by putting government debt out of reach of U.S. courts that have jurisdiction over some of the original bond contracts.
The bill would replace Bank of New York Mellon with state-controlled bank Banco Nacion as the trustee for bond payments. It would also allow holders of restructured bonds governed by foreign law to swap them for paper governed by Argentine law.
Both moves would be in violation of U.S. court orders.
U.S. District Judge Thomas Griesa in New York has banned Argentina from making interest payments on restructured debt until it settles with a group of hedge funds who rejected restructurings in 2005 and 2010 and are suing for full payment.
Griesa ordered Argentina to pay the funds $1.3 billion plus interest. Argentina says to do so would trigger additional demands from holdout investors and wreck the country's finances.
"Sometimes there are court decisions that cannot be followed," said Miguel Angel Pichetto, head of the government's Frente para la Victoria coalition in the Senate. "To pay the vulture funds would be very dangerous."
The bill is expected to become law before Sept. 30, when the next payment on Argentina's restructured bonds is due.
Investors stuck with more than 93 percent of Argentina's defaulted bonds agreed to the 2005 and 2010 restructurings, walking away with less than 30 cents on the dollar.
A small number of the roughly 7 percent of investors who declined to participate in the 2005 and 2010 bond swaps sued for 100 percent repayment. They won favorable U.S. court rulings that have forced Argentina into its second default in 12 years.
The funds that went to court are led by Elliott Capital Management and Aurelius Capital Management, two major players in the specialized realm of distressed debt investing. They are involved in buying up the bonds of troubled lenders for pennies on the dollar and then pushing to negotiate for profitable payments, sometimes through the courts.
Argentina, needing cash to develop its vast Vaca Muerta shale oil and gas formation in Patagonia, will remain unable to issue international bonds until the case is settled.
Argentina's debt swap plan is receiving a cold reception in New York, where Finance Secretary Pablo Lopez was meeting with investors, Thomson Reuters' IFR reported.
Implementation faces a number of hurdles, as any third party assisting the country in carrying out the exchange risks being held in contempt of court. There were no reports of Lopez meeting with the funds involved in the case.
Robert Cohen, a lawyer for Elliott unit NML Capital, spoke with reporters about a probe into what court documents describe as shell companies registered in Nevada. Elliott suspects the companies are hiding $65 million in embezzled Argentine assets.
NML has scoured the world for Argentina's sovereign assets that it can try to attach or seize. The fund subpoenaed 18 banks last week in an effort to track down the $65 million.
Cohen said the list of banks, all of which have at least a presence in the United States, has not been made public. (Additional reporting by Davide Scigliuzzo of Thomson Reuters' IFR and Daniel Bases in New York and Jorge Otaola in Buenos Aires; Editing by Biju Dwarakanath, Chizu Nomiyama, Leslie Adler, Matthew Lewis and Paul Simao)