(Adds comments from Argentina's president in the sixth and
seventh paragraphs)
By Shane Romig
The Federal Reserve Bank of New York has backed Argentina's
position in a case before a U.S. federal court, arguing that
injunctions shouldn't be issued against intermediary banks
processing debt-service payments to Argentine creditors.
The opinion is a boost to bondholders who accepted the country's
debt-restructuring offer and a setback to holdouts who turned up
their noses at the discounted deal and are trying to block any debt
payments unless they are also paid at the same time.
In a letter to the court, New York Fed General Counsel Thomas
Baxter said the possibility of an injunction seizing funds
transferred from intermediary banks to creditors would be
"overbroad and could have operational ramifications that impede the
smooth and efficient operation of the payments system."
A U.S. appeals court in late October ordered Argentina to begin
paying Elliott Management Corp.'s NML Capital Ltd. and other
holdouts alongside the rest of its creditors and sent the case back
to federal Judge Thomas Griesa in New York to hammer out the
details on how such payments must be made. Those hearings are under
way, and Mr. Griesa has said he wants to move quickly.
Judge Griesa has awarded about $1.6 billion to NML, which last
month managed to get a Ghanaian court to seize the ARA Libertad, an
Argentine navy training ship which had put into port there, as
compensation.
Argentina has been battling the holdouts, which it calls
"vulture funds," for a decade. While it has faithfully paid those
who took a restructuring deal of about 33 cents on the dollar for
93% of the defaulted bonds, officials have repeatedly said the
holdouts won't see a dime.
In a speech Monday, Argentina's President Cristina Kirchner
lauded the opinion letter from the Fed, reading passages aloud
which she said backed Argentina's position.
With the country's next debt service payments coming up on Dec.
2 and 15, the holdout creditors, including NML, are trying to
trigger a technical default so they can collect on credit default
swaps they have bought on Argentina's performing debt, Mrs.
Kirchner said. A spokesman for NML didn't respond to a request for
comment.
The latest ruling has spooked Argentina's bondholders, who fear
that it may prevent the country from making upcoming payments on
its restructured bonds.
Gramercy Funds Management, a creditor that accepted Argentina's
swap deal, has hired prominent attorney David Boies to argue its
position that they should be paid regardless of the dispute with
the holdouts.
The possibility of blocking the debt payments could "seriously
threaten the interests of numerous innocent third-party creditors
of the Republic of Argentina," Mr. Boies and his associates argued
to the court.
Bank of New York Mellon Corp. (BK), the trustee bank processing
the payments, has also submitted a brief to Judge Griesa, arguing
that threats by the holdouts to push for the bank's being found in
contempt if it processes the payments go too far.
"BNY Mellon wants to avoid any theoretical risk to itself or any
of the other entities involved in the distribution process," the
bank said in the brief, filed with the court Friday.
While not disputing the fact that Argentina should make good on
the judgements received by the holdouts, the New York Fed said that
the smooth operation of the financial system should be
protected.
"To avoid unnecessary confusion and disruption to the smooth and
efficient functioning of the payments system, the New York Fed
urges the court to enumerate precisely what persons or entities are
covered by the injunctions, to limit this list only to Argentina
and others in direct privity with it, to specifically exempt
payments systems such as Fedwire, and to reject plaintiffs'
invitation to broaden the reach of the injunctions to clearing
corporations and systems generally," the Fed bank said.
Write to Shane Romig at shane.romig@dowjones.com