(Recasts with latest statement from Argentina economy ministry, U.S. State Department rejecting Argentina's request to allow the International Court of Justice to hear dispute)
By Joseph Ax and Andrew Chung
NEW YORK/BUENOS AIRES Aug 8 Argentina's economy ministry once again defiantly asserted the country has made a required debt payment on restructured sovereign bonds on Friday night, just hours after a U.S. judge threatened a contempt-of-court order if Argentina did not stop issuing such statements.
U.S. District Judge Thomas Griesa, who has overseen the nation's long-running debt battle with hedge funds, railed at Argentina's lawyers at a hearing in New York a day after the publication of another so-called legal notice insisting the government has met its payment requirements and was therefore not in default.
Holding a newspaper copy of the notice, Griesa said if the false statements did not stop, a contempt of court order will become necessary.
Later on Friday, however, Argentina's economy ministry issued a statement accusing Griesa of "clear partiality in favor of the vulture funds."
"Judge Griesa continues contradicting himself and the facts by saying that Argentina did not pay," the statement said.
Meanwhile, a spokeswoman for the U.S. State Department said the United States would not permit the International Justice Court in The Hague to hear Argentina's claims that U.S. court decisions had violated its sovereignty.
"We do not view the ICJ as an appropriate venue for addressing Argentina's debt issues, and we continue to urge Argentina to engage with its creditors to resolve remaining issues with bondholders," the spokeswoman said in an email.
Argentina petitioned the International Court of Justice on Thursday, but the lawsuit could only move forward if the United States submitted voluntarily to the court's jurisdiction.
At the hearing, Griesa said he was not going to go further than a warning for now. He repeated that the two sides must continue negotiating with the aid of mediator Daniel Pollack.
Griesa did not specify whether he might seek to sanction Argentina or its lawyers, though he said he was "glad" to hear Jonathan Blackman, Argentina's lead lawyer, say his firm Cleary Gottlieb Steen & Hamilton did not aid in preparing the government's latest legal notices.
In rare circumstances, U.S. judges have held foreign governments in contempt and imposed monetary penalties. But such sanctions can be difficult to enforce, and federal appeals courts have split on whether foreign governments can be held in contempt at all.
Federal law largely protects the assets of foreign governments held in the United States, said Michael Ramsey, a professor of international law at the University of San Diego.
"You can't put Argentina in jail, so I'm not sure what he'd have in mind besides monetary sanctions," Ramsey said. "Argentina has refused to pay a valid judgment and I don't see why it wouldn't also refuse to pay a valid contempt order."
Blackman also complained of being attacked and lampooned by the lobby group American Task Force Argentina, which is partly funded by holdout investors.
Shortly after the hearing, Economy Minister Axel Kicillof said on public television in Argentina, "We will continue to work tirelessly to defend the rights of Argentina," and added that "Judge Griesa did not resolve anything" in court.
"He created this confusing and extraordinary situation," said Kicillof, who also played down concerns the case would cripple investment in Argentina.
NO SETTLEMENT IN SIGHT
Argentina missed a coupon payment after a grace period ended on July 30, pushing it into default on restructured debt from a previous default in 2002 on roughly $100 billion in sovereign bonds.
The government settled with nearly 93 percent of its bondholders in two restructurings but two deep-pocketed distressed debt investors held out and did not participate in the exchanges in 2005 and 2010. They are by far not the only holdouts, but have been the most prominent in their fight for full repayment on debt they bought at pennies on the dollar in a case that essentially comes down to a contract dispute.
In 2012, Griesa ruled in favor of the holdout investors, led by NML Capital Ltd, an affiliate of the $24.8 billion hedge fund Elliott Management Corp, and Aurelius Capital Management, who won a $1.33 billion judgement.
Argentina insists it is not in default because it deposited a $539 million coupon payment on exchanged bonds before a June 30 deadline. Griesa has called the deposit with trustee Bank of New York Mellon illegal and reiterated on Friday that "there has been no payment."
Payments to exchange bondholders have not been made because of Greisa's order, which stipulated the nation must concurrently pay the holdouts their award plus accrued interest.
Argentina has published legal notices in recent weeks disparaging Griesa and Pollack, who succeeded in getting the two sides to meet face-to-face for the first time in nearly 13 years but could not get them to an agreement by July 30.
Pollack issued a statement after the hearing saying it was his intention to "convene and conduct further negotiations until a solution is reached, however long that may take."
Argentina insists it cannot meet the demands of the court order, nor make a deal with the holdouts that is better than the terms offered in its two restructurings based upon a clause in its agreement known as the Rights Upon Future Offers (RUFO).
The RUFO clause expires on Dec. 31, 2014.
Reuters IFR has reported that private banks are trying to reach an agreement with the holdouts that would pay them 80 cents on the dollar for their Argentine bonds in hopes of getting the frozen coupon payment sitting at BNY Mellon released as soon as possible. (Additional reporting by Andrew Longstreth and IFR's Joan Magee and Davide Scigliuzzo in New York, Richard Lough and Hugh Bronstein in Buenos Aires; Writing by Daniel Bases; Editing by W Simon, Andrew Hay, Andre Grenon and Lisa Shumaker)