Argentina to negotiate with holdout investors for first time

NEW YORK (Reuters) - Argentine officials will begin to negotiate for the first time next week with hedge funds that refused to take part in its debt restructuring, a lawyer for the country said in Manhattan federal court on Wednesday.

"I have been told the plan is to be here next week to negotiate with the holdouts to resolve this situation," said Carmine Boccuzzi of Cleary Gottlieb Steen & Hamilton at a hearing before U.S. District Judge Thomas Griesa in Manhattan.

The negotiations are part of an attempt by the country to avoid default, though Boccuzzi said "an exchange offer is not happening at this time."

Griesa had ordered Argentina to pay the holdout funds $1.33 billion at the same time it pays bondholders who participated in the 2005 and 2010 restructurings of Argentina's $100 billion of bonds. The restructured bond holders are due a payment on June 30. If the payment isn't made, Argentina would enter a technical default on the restructured debt.

"What I want is a legal mechanism to prevent another situation where the Republic can laugh off another judgment," Griesa said on Wednesday.

The meeting between the hedge funds and Argentine officials would be the first time they've met face-to-face and could bring Argentina closer to concluding a years-long dispute that has made this one of the longest-running sovereign debt crises in recent memory. It has kept the country from accessing international capital markets since defaulting on $100 billion in debt in 2001-2002.

The news follows a Tuesday speech in Buenos Aires by Economy Minister Axel Kicillof, who said Argentina is taking steps so it can continue paying the vast majority of bondholders who agreed to a debt restructuring in the last several years - without paying the holdouts.

Argentine President Cristina Fernandez has labeled the holdout investors ?vultures? for picking over the carcass of the broken economy in the wake of the 2001-2002 default. In a televised address to the nation on Tuesday she said Argentina was the victim of ?extortion? by the holdouts, but that she was still open to negotiations and insisted she would continue to pay the more than 90 percent of creditors who accepted the restructuring terms in 2005 and 2010.

Argentina's debt prices fell again on Wednesday after Kicillof said the country wants to swap bonds governed by U.S. law for those governed by Argentine law so they would not be subject to U.S. courts that have made paying existing bondholders more difficult.

Paying the exchange bondholders outside of U.S. law would still be considered a default, according to legal analysts.

"Anything that doesn't comply with the bond terms is default," said Marco Schnabl of Skadden, Arps, Slate, Meagher & Flom. "If you change the payment place, that's default.?

Schnabl, who represented the Argentine social security system before Judge Griesa and filed a friend-of-the-court brief supporting Argentina at the U.S. Supreme Court, said that Argentina probably can't avoid default if it attempts to pay the exchange bondholders outside of the existing contracts.

"If some sort of solution acceptable to the government is not found, Argentina will probably follow through with the swap and default," wrote analysts at Eurasia Group on Wednesday. "What is harder to gauge is how much the government is willing to concede in the end (or how credible its threat really is)."

The U.S. denominated discount bonds due in 2033 were lately traded at 70.5 cents, down more than 12 cents since Friday. In that time, the yield on that bond has risen to 12.84 percent from 10.68 percent Friday, according to Thomson Reuters data.

On Monday, the U.S. Supreme Court declined to hear an appeal by Argentina in its battle against the hedge funds which refused to take part in its debt restructuring. This left intact Griesa's ruling ordering the country to pay the holdouts.

STAY LIFTED

As a result of the Supreme Court's decision, the 2nd U.S. Circuit Court of Appeals in New York formally lifted the stay it had placed on Griesa's injunction that bars payment to exchange bondholders via the U.S. banking system unless holdouts are paid at the same time. That means Griesa's order that Argentina pay all the bondholders at the same time, including the $1.33 billion to the holdouts, is now in effect.

?Lifting the stay was highly expected, since the Supreme Court had the last word on this,'' said Alberto Ramos, an analyst at Goldman Sachs. ``It is unclear whether the authorities really want to negotiate. I believe it would be in the interest of Argentina to be pragmatic and close this chapter. This would open access to external funding and would protect the economy.?

A technical default would not occur immediately on June 30 because the government has a grace period of 30 days before such a determination can be made.

"Notwithstanding the high uncertainty remaining, the government's open recognition that discussions with Judge Griesa are becoming a critical element for a permanent solution could be a welcome development," wrote credit analysts at Deutsche Bank.

The increased concern of default has boosted the cost of insurance against such an occurrence. The annual cost of insuring $10 million of Argentina's debt from default for five years rose to 2805 basis points, according to Markit.

Argentina has just $910 million of net notional amounts of CDS contracts, up from a low of $750 million reached in December 2013, according to data from the Depository Trust & Clearing Corporation. By comparison, Brazil has more than $17 billion.

The case is NML Capital Ltd et al v. Argentina, U.S. District Court for the Southern District of New York, No. 08-6978.

(Reporting by Joseph Ax, Nate Raymond, Alexandra Ulmer, Alison Frankel and Daniel Bases; additional reporting by Carolyn Cohn and Sujata Rao-Coverley in London. Editing by Chizu Nomiyama, Jonathan Oatis and John Pickering)