US court holds Argentina in contempt over bond payment plans

Argentina's holdout creditors won a symbolic victory on Monday night after a US judge found the country in contempt of court for taking "illegal" steps to avoid his orders.

US District Judge Thomas Griesa said Buenos Aires's steps to replace Bank of New York Mellon as the trustee for its restructured sovereign debt with local state-owned bank, Banco de la Nacion Fideicomiso, are "illegal and cannot be carried out".

Nonetheless, sources at Argentina's central bank told Reuters that the country still planned to make a $200m payment on Tuesday to holders of its restructured bonds, in continued defiance of Judge Griesa's orders. Hector Timmerman, the Argentine foreign minister, said the court ruling was a "violation of international law."

Argentina missed a July bond payment to holders of its restructured sovereign bonds after Judge Griesa ruled it could not be made unless Argentina also paid the holdout creditors in full on their defaulted debt. Argentina deposited $539m with BNY Mellon, but the bank, in compliance with Judge Griesa's orders, did not pass it on to restructured bond holders

Argentina says it cannot pay the holdouts, led by NML Capital, a subsidiary of hedge fund Elliott Management, as doing so would trigger the so-called RUFO clause that forbids the sovereign to offer better terms to holders of its restructured bonds. The clause expires at the end of this year.

A contempt of court ruling on a sovereign government is rare but an not unprecedented move. Roberto Cohen, the lawyer for NML Associates which is leading the case, was quoted by the leading Argentine daily La Nacion as saying: "We don't believe it [the ruling] will make matters worse as it is hard to imagine how the situation could get worse."

The holdouts have asked Judge Griesa to impose a daily fine of $50,000 - although Argentina could simply ignore that sanction, Mr Cohen acknowledged. Other steps potentially include barring Argentina from doing any business with US banks, although that could engender fresh litigation over whether Judge Griesa has the authority to do so.

Judge Griesa did not set a specific date to consider sanctions.

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