By Hugh Bronstein
BUENOS AIRES (Reuters) - Argentina came out swinging on Wednesday against the U.S. judge overseeing its debt default case, defying a threatened contempt order and dashing market hopes it might soon restart talks with the hedge funds suing the country.
A group of holdout investors have gone to court for full repayment on Argentine sovereign bonds that went into default in 2002. The funds rejected debt restructurings in 2005 and 2010, holding out for better terms.
U.S. District Court Judge Thomas Griesa, who has presided over the long-running legal battle, said in New York on Friday he would issue a contempt order unless Argentina stopped claiming it had met its obligations and was not in default.
Far from backing off of those assertions, Cabinet Chief Jorge Capitanich said Griesa had been paralyzed by his own lack of understanding of the case and that no new talks had been scheduled with the hedge funds.
"The proper conditions do not exist to negotiate," Capitanich said.
In 2012, Griesa ruled in favor of holdout hedge funds led by Elliott Management Corp and Aurelius Capital Ltd., awarding them $1.33 billion plus interest and barring Argentina from repaying the holders of restructured debt without paying the holdouts at the same time.
In June, Argentina deposited $539 million into an account in the Bank of New York Mellon, the intermediary, with the intention of using the funds for a coupon payment on the restructured bonds.
Griesa ruled that deposit violated his 2012 order and ordered the money frozen. As a result, Argentina effectively missed the coupon payment after a grace period ended on July 30, pushing it into default on its restructured debt.
Holders of the restructured bonds have asked Griesa to allow Bank of New York Mellon to release the money so they can get paid, and Capitanich criticized the judge for not acting on those requests.
"His lack of decision clearly comes from not understanding the process, not understanding Argentina's status as a sovereign country, not understanding that his actions violate sovereign immunity, which transcends judicial concerns and enters the realm of international relations, which are managed by the executive branch of the U.S. government," Capitanich said.
With no negotiations scheduled, the case is in limbo while international banks struggle to reach a deal to buy some of the debt held by the holdouts.
"The judge cannot issue an order of contempt because he cannot enforce it against a sovereign country," Capitanich said.
"He cannot embargo the funds because they do not belong to Argentina, but to the (restructured) bondholders. The judge cannot make any decision because he knows he would be effectively violating contracts," he added.
'VULTURES'
Argentina has long accused the judge of overstepping his bounds and being partial toward the funds that bought Argentine bonds at steep discounts and are characterized by President Cristina Fernandez as "vultures" out to wreck her country's finances in their pursuit of huge profits.
"The only thing he is doing, at the express instruction of the vultures, is to block the payment process after Argentina met its obligations," Capitanich said.
Opinion polls show most Argentines side with their government against the funds.
The Argentine peso fell 1.15 percent to 13.01 per U.S. dollar in black market trading on Monday. Traders said the currency was pressured lower by pessimism over possible talks between Argentina and the holdout hedge funds.
Economy Minister Axel Kicillof on Tuesday posted a drawing on his Facebook page of a menacing, beady-eyed vulture wearing a shirt with the letters "U.S.A." and emblazoned with the U.S. flag. Next to the drawing are written the words "greed" and "cruelty".
The case could get a lot messier should holders of Argentina's newly defaulted debt decide to declare principal and interest immediately due. The move, known as acceleration, could complicate efforts to put the country's debt woes to rest.
An acceleration on the restructured bonds could also deal a blow to the hedge funds in the case, who may suddenly have to share their claim with a much larger pool of investors.
The International Swaps and Derivatives Association (ISDA) Determinations Committee was scheduled on Wednesday to discuss in a conference call the next step in settling the prices on what investors will receive for credit default swap contracts on Argentine debt, a side issue to the main dispute.
(Additional reporting by Davide Scigliuzzo of Thomson Reuters IFR in New York, Daniel Bases in New York, Sarah Marsh and Walter Bianchi in Buenos Aires; Editing by Jonathan Oatis and Paul Simao)