Argentina will not let Citigroup quit 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, setting up a possible showdown between the leftist government and the banking giant over 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 to revoke Citibank Argentina's license 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 announced on Tuesday that it planned to sell parts of its custody business in Argentina, in which it acts as custodian of some Argentine bonds and processes payment for the ultimate security holder, or end some client relationships. That decision that may hamper the government's efforts to pay bondholders and return to global markets.

Fernandez denigrates the holdout creditors as "vultures" willing to cripple a nation's economy in pursuit of huge profit. The funds say she is turning her back on legitimate debt obligations.

Under Argentina's banking regulations, the Central Bank of Argentina could cancel Citibank Argentina's operating license.

Fernandez' political opponents have long complained about the central bank's diminished independence during her leadership and one banking industry source said such a decision would be a political one.

"That would be the perfect scenario for Fernandez to present herself as the victim," one official at a state bank said.

DEFAULT

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

If it refuses to handle the payment, and the funds do not reach creditors, Argentina's default on its restructured debt held under foreign law will spread to the local law bonds. Griesa had previously allowed Citibank Argentina to make three one-time payments on local law paper.

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 defaulted on a record $100 billion in 2002. 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.

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

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