ARGENTINA suffered a stinging blow late on Wednesday when a New York federal judge ordered immediate payment to holders of defaulted bonds, citing threats by the country's leaders to defy his rulings in a decade-old dispute.
In an ruling delivered just as the United States headed off for its Thursday Thanksgiving holiday, U.S. District Judge Thomas Griesa rejected Argentina's request to maintain his previous order halting payments to holdout investors who did not participate in two bond exchanges of defaulted sovereign debt.
If Griesa's ruling is upheld and Argentina chooses to defy him, U.S. courts could ultimately inhibit debt payments to creditors who agreed to the swaps out of consideration for investors who rejected Argentina's terms at the time.
That would trigger a technical default on approximately $24bn worth of debt issued in the 2005 and 2010 exchanges, although Argentina has said it will keep making routine repayments and that funds deposited for creditors within the South American country cannot be seized.
Argentina still has several appeal options, but Griesa's decision to lift his stay leaves the country exposed in the meantime, legal specialists and economists say.
"We're cornered," said former Finance Secretary Miguel Kiguel.
The ruling is the latest development in a litigation saga that has lasted more than ten years and now appears to be favoring holdout bond investors such as Elliot Management Corp's NML Capital Ltd and Aurelius Capital Management.
Last week, Argentina, which defaulted on its bonds in 2002, asked Griesa to keep his stay order in place while the U.S. 2nd Circuit Court of Appeals for New York considered the country's request for a revisitation of an unfavorable ruling in October.
Griesa wrote that he would ordinarily leave his order in place pending a ruling from the 2nd Circuit. However, he concluded this was not possible given comments from Argentine officials, including President Cristina Fernandez, that Argentina would not pay anything to the holdout bondholders.
"It is the view of the District Court that these threats of defiance cannot go unheeded, and that action is called for," Griesa wrote, saying the payments should be made as soon as possible.
The 2nd Circuit already upheld Griesa's Feb. 23, 2012 decision that Argentina violated equal-treatment provisions for all creditors when it chose to pay exchange bondholders and not holdout bondholders.
Given that Griesa's latest decision still needs the final blessing of the 2nd Circuit, he ordered that rather than Argentina paying the plaintiffs directly, it should deposit the money in an escrow account by Dec. 15.
Griesa was unconvinced by Francisco Eggers, Argentina's National Director of the National Bureau of Public Credit, who submitted a signed affidavit last week saying the government would abide by the court's rulings and would not seek to evade its directives.
In Buenos Aires, economy ministry officials were discussing the ruling with the country's lawyers and no one could be reached to comment.
Griesa's rulings on Wednesday answered the 2nd Circuit's lingering questions as to what holdouts should be paid and by what mechanism, as well as how the judge would treat third-party banks such as Bank of New York Mellon, which act as transfer agents for restructured bondholders.
Griesa's decisions go back immediately to the 2nd Circuit, which will decide if it agrees with his logic or not.
After the October decision, President Fernandez said her country would not pay "one dollar to the vulture funds." This is her term for holdout investors who buy distressed or defaulted debt and then sue in international courts for full payment.
In his ruling, Griesa said the less time Argentina was given "to devise means for evasion, the more assurance there is against such evasion."
"There is no question about what is 'currently due' to plaintiffs," Griesa wrote. "The amount that is currently due is the amount of the unpaid principal, the due date of which has been accelerated, and accrued interest."
NML and Aurelius, the holdouts with the largest claims on unrestructured debt, are owed approximately $1.33 billion.
"Argentina owes this and owes it now," Griesa said. "It should be emphasized that these are debts currently owed, not debts spaced out over future periods of time."
Griesa said NML and Aurelius should be paid concurrently or ahead of exchange bondholders.
Argentina is due to pay bondholders who participated in two debt restructurings in 2005 and 2010 approximately $3.14 billion in interest payments next month and not again until March 2013.
Griesa rejected arguments from exchange bondholders that full payment to NML and Aurelius would infringe on their rights.
"In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating," he wrote.
"Moreover, it is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After ten years of litigation this is a just result," the judge said.
Griesa's rulings were made available by plaintiff’s attorneys, who sometimes receive them before they become available in the court's electronic filing system.
The 2nd Circuit has also directed Griesa to spell out precisely how his injunctions would apply to third-party banks.
Among the banks is BNY Mellon, which transfers funds from Argentina to the country's bondholders. It argues that the injunction would interfere with its duties to the exchange bondholders and could cause a wider disruption to the largely automated international bank payment systems.
Griesa said BNY Mellon's arguments "miss the point" and if Argentina followed the appeals court ruling there would be "no problem" about the money ending up in the right accounts.
He said that if Argentina attempted to make payments to the exchange bondholders in violation of the court's rulings, third party institutions should be "held responsible" for ensuring they are not taking steps to violate the law.
BNY Mellon had no immediate comment.
Lawyers say Griesa's decision to lift the stay preventing immediate payment leaves the country exposed.
"The government can still appeal en banc -- before all 13 judges (at the 2nd Circuit court), and at the Supreme Court. In the meantime, however, the stay is no longer in effect unless the court or the Supreme Court says it should remain in force," said Eugenio Bruno, a lawyer who advises holders of the restructured bonds.
"These are unlikely scenarios, but they're not out of the question," he told Reuters.
Stephen Sigmund, a spokesman for Aurelius, declined comment as did Peter Truell, a spokesman for Elliott Management.