* S&P pushes rating deeper into junk bond territory
* Appeals court ruling requires payments to holdouts
* Government vows to fight judicial decision
* Fitch puts foreign currency debt rating on negative watch
By Hilary Burke
BUENOS AIRES, Oct 30 Argentina was hit by a sovereign credit ratings downgrade on Tuesday after the government blasted a U.S. court ruling that would force the country to repay creditors who have sued to collect on defaulted bonds.
Just hours after the economy minister said the country will never pay the "vulture funds", Standard & Poor's cut Argentina's rating to B-minus from B. The agency placed a negative outlook on the rating, which is already deep in junk bond territory.
"The downgrade reflects our view that the government of Argentina could face increasing debt management risks," S&P said in a statement.
The court ruling "could effectively increase Argentina's liabilities and the government's debt service," the statement said.
The South American country staged the world's biggest sovereign debt default in 2002 during a deep economic crisis. It has restructured about 93 percent of the roughly $100 billion in default through debt swaps launched in 2005 and 2010.
But "holdout" creditors who rejected the swaps continue to press in courts worldwide for full repayment on the bonds.
On Friday, a federal appeals court in New York ruled that Argentina violated bond provisions to treat all creditors equally when it made payments to creditors who accepted the swaps while refusing to pay the holdouts.
"We are never going to pay the vulture funds. Anyone who thinks otherwise hasn't understood a thing," Economy Minister Hernan Lorenzino said via Twitter late on Monday.
"We're going to continue paying the 93 percent of creditors who entered the swap, in dollars, euros and yen ... we will not be pushed into the trap of default," he tweeted.
Argentina refers to investment funds that buy distressed or defaulted debt and then litigate to be repaid in full as vulture funds.
The ruling initially sent Argentine bond prices reeling, widened the country's risk spread as measured by JPMorgan's EMBI+ bond index, and pushed the price of protection against an Argentine default to a nearly four-year high.
Earlier on Tuesday Fitch put Argentina's foreign currency debt ratings on negative watch, saying the court ruling "increased uncertainty about Argentina's ability to service its international securities issued under New York law on a timely basis using the U.S. financial system."
The decision means Fitch could decide to downgrade the country's "B" long-term foreign currency credit rating.
"A missed payment on debt would constitute a default event and Fitch would move Argentina's foreign currency (rating) to Restricted Default," the rating agency said, adding that a solution allowing Argentina to keep servicing its New York-law debt without interruption would push the ratings outlook back to stable.
Lorenzino has been a fierce critic of credit ratings agencies and recently accused them of releasing "terrorist" reports.
Argentine Finance Secretary Adrian Cosentino told Reuters the government will take all legal steps necessary to fight the appeals court ruling, which aims to force the country into paying holdout creditors, led in this case by NML Capital Ltd and the Aurelius Capital Management funds - every time it makes payments to the creditors who hold restructured bonds.
Under Argentina's so-called "lock law," the government must get prior congressional authorization to be able to reopen its debt restructuring offer or reach any kind of settlement with the holdout creditors.
Government officials say that law bars it from complying with U.S. court orders to pay bondholders several billion dollars in compensation for the default.
"We will do whatever's necessary to continue honoring our debts, as we have done since 2003," Lorenzino tweeted. "Argentina's capacity and willingness to pay has been demonstrated time and time again. They can't change this with court rulings."
Earlier this month, NML Capital obtained a court order in Ghana to seize an Argentine military training vessel as part of its drive to collect $300 million on defaulted bonds. Most of the ship's crew had to be evacuated.
Argentina has been largely locked out of global debt markets since its default due to the possibility that holdouts could try to seize the funds involved in any new global debt issue.
President Cristina Fernandez's government uses the central bank's foreign reserves to pay its debts. It has imposed tough currency controls to stem capital flight and curbed imports to bolster the trade surplus, a key source of foreign exchange.