By Hugh Bronstein
BUENOS AIRES (Reuters) - Argentina said on Tuesday it would meet with a mediator in the country's dispute with holdout investors for a second time this week, lifting market hopes for a deal needed to avoid another painful debt default.
With the economy already in recession, President Cristina Fernandez's cash-strapped government has until July 30 to reach an agreement with hedge funds suing for full repayment of sovereign bonds which Argentina defaulted on in 2002.
On Argentina's local over the counter market, benchmark Discount bonds
Argentina's cabinet chief Jorge Capitanich did not mention whether the "holdout" funds led by Elliott Management Corp and Aurelius Capital Management would participate in Friday's meeting. There was no immediate comment from the funds.
Economy Minister Axel Kicillof spent four hours hashing through the case in New York on Monday with the mediator, Daniel Pollack, who was appointed by U.S. District Judge Thomas Griesa to find common ground in the years-long dispute.
"It was agreed to continue this meeting on Friday," Capitanich said. "It has been an intense dialogue."
Kicillof flew back to Buenos Aires on Tuesday and described the session with Pollack as "an important advance".
"We will go back on Friday," Kicillof told reporters.
In the last few months he has sealed deals with the Paris Club of creditor nations and Spanish oil major Repsol
Without a deal this month, a court ruling by Griesa would prevent the country from making coupon payments to creditors who accepted a large writedown on their debt holdings after 2002. That would put Argentina in default.
PAYMENT IN LIMBO
More than 92 percent of creditors accepted less than 30 cents on the dollar in restructurings worked out in 2005 and 2010. The holdouts shunned those terms and sued for full repayment of $1.3 billion plus interest, but they say they are willing to negotiate with the government.
Griesa blocked a June 30 coupon payment that Argentina tried to make on the restructured bonds, triggering the start of a 30-day grace period ending July 30. The two sides have yet to sit down face to face at the negotiating table.
Tuesday's bond price gains added to a year-to-date rally driven by Argentina settling disputes with Repsol over the 2012 nationalization of energy company YPF
"The market is moving today because the door to an agreement is open," a local trader said, asking not to be named.
Argentina for years refused to negotiate with the holdouts, portraying them as "vultures" circling the corpse of the country's 2002 default, which tossed million of middle class Argentines into poverty.
Argentina says Griesa is biased in favor of the holdouts and that he overstepped his powers by blocking the coupon payment.
The government published a two-page legal notice in the New York Times on Tuesday, saying it "duly deposited the amounts of interest due on the New Debt Securities issued within the framework of the 2005 and 2010 Sovereign Exchange Offers."
It said that Bank of New York Mellon, the trustee bank, is required to distribute those funds to the bondholders in question, calling BONY Mellon?s failure to do so a "violation of its obligations".
BONY Mellon had no comment on the legal notices from the government. A source with direct knowledge of the situation said the bank will file a motion to Judge Griesa on Thursday seeking guidance on what it should do with the money.
(Additional reporting by Jorge Otaola and Richard Lough in Buenos Aires and Daniel Bases in New York; Editing by W Simon, Chizu Nomiyama, Peter Galloway and Andrew Hay)
