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(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 email@example.com