October 4, 2013 / 12:42 AM / in 6 years

U.S. judge says Argentina debt swap plan violates court order

NEW YORK (Reuters) - Argentina’s proposal to use a debt swap to pay some of its creditors would violate a U.S. court injunction, a judge in New York said on Thursday.

Argentina's President Cristina Fernandez addresses the 68th United Nations General Assembly at UN headquarters in New York September 24,2013. REUTERS/Justin Lane/Pool

The order by U.S. District Judge Thomas Griesa came in response to a proposal in August by Argentine President Cristina Fernandez that would enable her government to keep paying creditors who participated in restructurings after the country’s $100 billion default in 2002.

Argentina’s government proposed allowing a voluntary swap of foreign debt in exchange for bonds governed by local law after a U.S. appellate court ruling in August upholding an earlier Griesa decision requiring the country to pay $1.33 billion in favor of holdout bondholders.

Implementation of Fernandez’s plan, or anything similar, would violate the earlier injunction, Griesa said in his order, which he said was issued “for the avoidance of doubt” over his court’s position on Fernandez’s plan.

The decision further complicates Argentina’s strategy in a case that could ultimately go before the U.S. Supreme Court and has created worries about a potential default by South America’s second-largest economy.

During two restructurings in 2005 and 2010, holders of about 93 percent of Argentina’s debt agreed to swap their bonds in deals giving them 25 cents to 29 cents on the dollar.

But bondholders who did not swap, led by hedge funds NML and Aurelius Capital Management, instead went to court in New York seeking payment in full.

Argentina calls these bondholders vultures and has vowed not to pay them.

“Once again the judge has issued an order at the behest of the vultures,” finance secretary Adrian Cosentino said in a statement, vowing to use all legal avenues at its disposal to guarantee continued service of its restructured debt.

Griesa has ruled that the holdout bondholders deserved equal treatment with the so-called exchange bondholders. He also ordered Argentina to pay $1.33 billion into escrow for the holdouts before paying the exchange bondholders, setting Argentina on course to default on its debt.

In August, Fernandez proposed a voluntary debt swap as a means of repaying the exchange bondholders.

Griesa’s order on Thursday was proposed by holdout bondholders led by the hedge fund NML Capital Ltd, a unit of Paul Singer’s Elliott Management Corp, which has been suing Argentina for payment on defaulted debt.

“Plaintiffs are surely within their rights to seek a remedy for this new problem,” Griesa said, in a separate order on Thursday, of Fernandez’s proposed debt swap.

The judge also ordered that with any plan Argentina puts forward that might violate the injunction, the country must disclose to the holdout bondholders within five days any communications to various parties regarding them.

Griesa said the court would retain jurisdiction to monitor and enforce its orders to account for any “materially changed circumstances,” including Argentina’s failure to abide by the order’s terms.

A spokesman for NML declined to comment. A lawyer for Argentina did not immediately respond to a request for comment.

The case is NML Capital Ltd v. The Republic of Argentina, U.S. District Court, Southern District of New York, 10-05338.

Reporting by Nate Raymond; Editing by Ken Wills

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