* Argentina says U.S. court order to pay holdouts must be
* BNY Mellon, other third parties could face "extreme harm"
* Argentina says ruling could discourage use of N.Y. law
(Updates to include Fitch downgrade of Argentine rating)
By Nate Raymond
Nov 27 Shaken by the prospect of another debt
default, Argentina has sought to halt a U.S. court order that it
must pay $1.3 billion to a minority of its creditors by
mid-December by trying to persuade an appeals court this would
hurt banks and other investors.
The move by Argentina follows a separate move by other
creditors late Monday to also overturn the court order to pay
the small group of bondholders who did not participate in the
country's 2005 and 2010 debt restructurings.
After a legal battle lasting nearly a decade, U.S. District
Judge Thomas Griesa last week ordered Argentina to deposit
money before Dec. 15 to pay the so-called "holdout" creditors
who did not agree to the debt restructurings. About 93 percent
of Argentina's other bondholders participated in the plans.
While the legal battle continues, Fitch Ratings agency
downgraded the country's sovereign credit rating to "CC" from
"B" on Tuesday. Fitch said it views an Argentine default as
"probable" after the court decision.
The "holdout" investors sued to recover the full value of
bonds that Argentina stopped paying in 2002, setting up a battle
with the country's left-leaning government, which branded them
as "vulture funds" and has refused to pay them.
The funds got a major boost last month when a U.S. appeals
court ruled Argentina must pay them in full when it services the
restructured debt that most of the country's other creditors
grudgingly accepted. That deal included a painful "haircut" or
writedown for investors of about 70 percent of the bonds' value.
The litigation has kept the country out of global credit
markets for the last decade and could spark a new debt crisis in
Latin America's No. 3 economy by jeopardizing payments on $24
billion of the restructured debt, Argentina's lawyers argue.
They also say the latest rulings could undermine the ability
of other governments to negotiate future debt restructurings.
In an emergency motion to the 2nd U.S. Circuit Court of
Appeals late Monday, Argentina sought to suspend an order made
by U.S. District Judge Thomas Griesa in New York last week,
requiring that Argentina deposit the $1.3 billion in an escrow
account by Dec. 15, when a roughly $3 billion payment comes due
on Argentina's growth-linked GDP warrants.
Argentina announced on Monday that it appealed the order and
the court papers were made public on Tuesday.
The South American country said in its motion that the 2nd
Circuit should delay Griesa's payment order while it appeals
other aspects of the case. It said forcing a payment to holdout
creditors would destroy its debt restructuring and cause
"extreme harm to numerous third parties."
Prices for the debt issued in Argentina's swaps - including
Par and Discount bonds - have sunk by as much as 30 percent in
the last month. At the same time, the cost of protection against
an Argentine default has spiked higher.
Argentina said it could not comply with Griesa's order under
local law, which prohibits paying the holdout creditors on
better terms than the bondholders who accepted the debt swaps,
known as "exchange bondholders".
Argentina also said it may not be able to service its
restructured debt if Griesa's order remains in place. The
roughly 93 percent of bondholders who agreed to swap their
defaulted bonds at a heavy loss now fear a "technical default"
and some of them have appealed against Griesa's ruling, too.
"The order for an immediate escrow under these threats is
impossible to comply with and disregards the many third party
interests involved as well as the Republic's sovereignty,"
Argentina said in the motion.
Kathryn Rooney Vera, Latin America strategist at Bulltick
Capital Partners in Miami, said the court might be sympathetic
to those third-party U.S. intermediaries.
"The third party entities will have more sway than
Argentina, as you can tell from the official ruling," she said.
"The courts don't care about Argentina and what they think, more
about how this is going to affect the parties."
'AIDERS AND ABETTORS'
Griesa's order issued last Wednesday was a setback for
Argentina's fiery President Cristina Fernandez, who has said she
would never pay the "vulture funds."
They include Elliott Management Corp affiliate NML Capital
Ltd and the Aurelius Capital Management funds. Their spokesmen
either had no immediate comment or did not respond to a request
for comment on Tuesday.
Griesa's order came in response to an Oct. 26 finding by the
2nd Circuit that Argentina violated bond provisions requiring it
treat bondholders equally when it paid the creditors who entered
the debt swaps ahead of the holdouts.
The 2nd Circuit sent the case back to Griesa to have him
address how the payment formula would work and determine how the
court's injunctions would apply to third parties, such as Bank
of New York Mellon Corp, which acts as trustee for the
In its brief on Tuesday, Argentina said Griesa's order
failed to address the 2nd Circuit's concerns.
"It is unprecedented - and unwarranted - to hold liable as
aiders and abettors participants in the financial markets doing
no more than carrying out their normal business functions and
fulfilling their own obligations to third parties," it said.
The country said it would be "manifestly unreasonable" to
apply the injunction to BNY Mellon. Once funds are transferred
to BNY Mellon, Argentina said they are no longer the country's
property and belong exclusively to the exchange bondholders.
Argentina also said allowing the order to remain standing
would "both hugely impair the use of New York law to govern
sovereign and corporate issuances and severely disadvantage New
York financial institutions with respect to such issuances."
A spokesman for BNY Mellon did not immediately respond to a
request for comment. The bank has said it does not believe it
should be bound by the injunction.
A group of exchange bondholders on Monday filed a separate
motion backing Argentina in seeking a halt to Griesa's order.
Argentina said those bondholders "could not have anticipated
"Had the exchange bondholders remotely understood that their
contracts supported this extraordinary result, no one would have
entered into an exchange offer in the first place," Argentina
The case is NML Capital Ltd et al v. Argentina, 2nd U.S.
Circuit Court of Appeals, No. 12-105.
(Reporting by Nate Raymond in New York; Additional reporting by
Hilary Burke and Jorge Otaola in Buenos Aires and Daniel Bases
and Gabriel Debenedetti in New York; Editing by Dan Grebler and