A grafitti reading ‘Homeland or vultures’ on a sidewalk in Buenos Aires. Argentine President Cristina Fernandez characterises hedge funds suing the country for full repayment of defaulted debt as ‘vultures’ out to wreck Argentina’s finances. Photo: Marcos Brindicci/Reuters

In a rare move, a US judge held Argentina in contempt, saying the country is taking “illegal” steps to evade his orders in a dispute with hedge funds over defaulted debt.

A source at Argentina’s central bank nevertheless said the country plans to deposit an interest payment at a local bank yesterday, in direct defiance of US District Judge Thomas Griesa’s admonitions.

Griesa, who has overseen the litigation in New York for years, put off a decision on whether to impose sanctions on the South American country, which defaulted in July for the second time in 12 years after failing to reach a deal with the hedge funds. But he issued a clear warning that Argentina must stop efforts to get around his rulings by making payments locally.

“These proposed steps are illegal and cannot be carried out,” Griesa said during a court hearing in lower Manhattan.

Argentina must stop efforts to get around rulings by making payments locally

Those steps, he said, include legislation Argentina passed that would allow it to replace Bank of New York Mellon Corp. as trustee for some restructured debt with Banco de la Nacion Fideicomiso while allowing a swap of that debt for bonds payable in Argentina under its local laws.

Despite his ruling, Argentina plans to deposit an interest payment of at least $200 million with that bank, the central bank source said.

The developments followed a familiar pattern in the litigation, in which Griesa criticises Argentina for disobeying his orders and Argentine officials defiantly continue to do so.

Argentine Foreign Minister Hector Timerman said in a statement that Griesa’s decision was a “violation of international law” and would have no impact other than to further the fight of the “vulture funds” against Argentina.

Griesa has called on Argentina to reach a settlement with the holdouts, appointing a mediator to oversee talks that have thus far been unsuccessful.

Argentina missed a bond coupon payment in late July after Griesa ruled it could not be made unless the country also paid more than $1.3 billion to a group of US funds that rejected previous bond restructurings and are demanding full repayment.

Argentina claims it cannot pay the holdouts, led by Elliott Management Corp’s NML Capital Ltd and Aurelius Capital Management, on what would be better terms than the investors who exchanged their defaulted bonds under the so-called RUFO clause (Rights Upon Future Offers). Despite the interest payment scheduled for yesterday, it is far from clear that the country will be able to locate bond holders in order to pay them.

Instead, the payment may allow Argentina to continue to maintain it has made its payments as required and is therefore not in default.