Argentina has a gun to Citibank's head, and it's going to go off at the end of September.
That's what will happen if Citi follows a federal court order and doesn't make a $5 million payment on its $8.4 billion domestic Argentine bonds, Citi lawyer Karen Wagner told a three-judge appeals panel Thursday.
"It will be a total disaster," she said.
The legal dust-up over a small interest payment on Argentine law bonds is not just about whether Citibank will get kicked out of the South American country, as has already happened to another US bank.
The issue is whether Citi will be the "weakest link" in a chain of payments that could enable Argentina's recently enacted debt swap to work, lawyers for Paul Singer and his hedge fund cohorts said Thursday.
Last week, Argentina passed a law to swap its debt into local law bonds so that it can avoid the US court injunction that would force it to pay the Singer group $1.6 billion it owes them.
The hedge funds, unlike most investors, apparently think the swap could work. That's why they want to make sure US courts also take aim at Argentine law bonds.
In late July, the funds convinced Manhattan federal judge Thomas Grisea to change his ruling on whether the bonds held by Citibank, based in Argentine law, would fall under his sweeping injunction.
"Argentina wants Argentine law bonds not to be covered by this injunction," the hedgies' lawyer Ray Englert said.
Citi is worried about losing its vast Argentine retail banking business. But Englert said Citi should simply leave of its own accord.