Citigroup cannot quit Argentine custody business -govt source

BUENOS AIRES/NEW YORK (Reuters) - Argentina will not allow CITIGROUP (C.NY)Inc. to exit its local custody business, a senior source in the government said on Wednesday, a day after the bank said it planned to do so after a U.S. judge denied it permission to process some sovereign debt payments.

The bank has found itself at the center of a bitter court battle between Argentina and a group of New York-based hedge funds that were awarded full payment on their defaulted sovereign bonds by U.S. District Judge Thomas Griesa.

Griesa barred Argentina from servicing other debt and blocked financial institutions from processing payments, including an upcoming March 31 payment, until it paid the funds.

But Argentina, arguing that Griesa's rulings impinge its national sovereignty, has threatened sanctions on Citigroup if it does not process the next payment.

"There is no way we will let them exit their (custody) business," said the source, who is familiar with President Cristina Fernandez' view on the matter.

Citigroup said on Tuesday it may sell portions of the business or end some customer relationships, a decision that may complicate Argentina's efforts to pay bondholders and return to global markets.

Argentina set a Wednesday deadline for the bank to inform authorities whether or not it planned to process the upcoming coupon payment on its 2038 dollar-denominated Par bonds worth about $3.7 million.

Earlier, Argentina filed a motion in Griesa's court opposing claims by more than 500 "me-too" creditors seeking payment on debt worth $5.4 billion, owed since the country's 2002 default.

These creditors' claims, filed by March 3, are separate from the $1.33 billion plus accrued interest awarded to the hedge funds by Griesa. Argentina had insisted payment of that debt would unleash a torrent of claims it could not afford.

"As predicted by the Republic, the flood-gates have now opened," Argentina said in a motion filed in the court.

Argentina brands the creditors holding out for full payment "vultures" for seeking to pick clean the carcass of the country's record $100 billion default.

Investors holding more than 92 percent of the defaulted debt accepted large writedowns in subsequent restructurings. The hedge funds group and the 526 creditors filing claims rejected the bond swaps.

Argentina said there was now $10 billion in judgments and claims before Griesa, making "compliance even more unattainable.

Now is the time for the court to draw the line on plaintiffs' extravagant demand," it said.

(Reporting by Nate Raymond; Writing by Richard Lough Editing by W Simon and Dan Grebler)

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