The move by leaders of a "lawless" Argentina to avoid paying a group of US hedge funds $1.65 billion on defaulted debt was dealt a blow on Thursday when the judge overseeing the case said the proposed action was illegal.
Still, Judge Thomas Griesa, after a hastily called hearing in Manhattan federal court, refused a request by the hedge funds to hold the country in contempt for just attempting the move.
Argentina's fiery, populist President Cristina Kirchner late Tuesday said the country would look to swap tens of billions of exchanged bonds, issued under US law, for bonds issued under Argentina law.
The move was the latest attempt by Kirchner to avoid paying the hedge funds, led by Paul Singer's Elliott Management, which refused to exchange their bonds during the country's debt restructurings. Instead, they are demanding full payment — plus interest.
Griesa ordered Argentina not to pay the $539 million due the 92 percent of bondholders who exchanged their bonds unless it also paid Singer and other holdouts.
When Argentina refused to pay the holdouts in July, the country went into default.
Kirchner has called the holdouts "vultures" and has sworn not to pay them a dime more than the exchange bondholders.
At the hearing, Griesa repeatedly said Kirchner's recent proposal to swap the bonds is "invalid, illegal and in violation of current court orders and injunctions."
The judge called the country "lawless" a dozen times during the 75-minute hearing
Two weeks ago, Griesa threatened to hold the country in contempt for making what he called "false and misleading" statements about its default — and hours after Kirchner unveiled her swap idea, Singer filed papers asking Griesa for just such a remedy.
But Singer was denied.
Argentina says Griesa's ruling has put it in an untenable situation: Paying Singer could lead to an additional $140 billion in claims by other bondholders.
The proposal floated by Kirchner this week was a repeat of what lawyers for Elliott Management and Aurelius Capital, another holdout, called "repeated, blatant violations" of Griesa's order.
The idea of a local bond swap was first mentioned almost two years ago.
At least twice before, Griesa prohibited Argentina from carrying out the plan.
Griesa's order also bound advisers and intermediaries from "aiding and abetting" violations of his order, and such complications have led many to believe the swap as envisioned by Argentina won't be successful.
But some bondholders aren't so sure about that, and neither apparently are the holdouts.
Ed Friedman, representing Aurelius and arguing for contempt sanctions, said no settlement would be possible until it becomes "crystal clear to Argentina that its evasion efforts will not succeed."
Legal experts have said the most Griesa could do is fine Argentina, which would merely add to its financial burden.
A contempt citation might even increase Kirchner's profile at home, where resistance to Singer and attacks on the US legal system have raised her flagging popularity.
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