Argentina urges U.S. appeals court to delay payment to creditors

(Reuters) - Facing fears of another default, Argentina on Tuesday urged a U.S. appeals court to suspend an order requiring it to pay $1.3 billion to bondholders who rejected two debt restructurings stemming from the country's 2002 financial crisis.

The emergency motion to the 2nd U.S. Circuit Court of Appeals seeks to halt the effects of an order made by U.S. District Judge Thomas Griesa in New York last week, requiring Argentina to deposit the money in escrow by December 15.

Argentina said the 2nd Circuit should delay the order while the country pursues further appeals in the case, arguing that Griesa's ruling would result in the "destruction" of its debt restructuring and cause "extreme harm to numerous third parties."

The South American country also said it could not legally comply with Griesa's order under Argentine law, which prohibits paying the holdout creditors on better terms than the bondholders who accepted the 2005 and 2010 debt swaps.

Argentina also said it may not be able to service its debts if Griesa's order remains in place.

"The order for an immediate escrow under these threats is impossible to comply with and disregards the many third party interests involved as well as the Republic's sovereignty," Argentina said in the motion.

Griesa's order, issued last Wednesday, caused worries among the roughly 93 percent of bondholders who took heavy losses when they agreed to swap their defaulted debt. They fear Argentina might enter a "technical default" on $24 billion in restructured debt.

The order also was a setback for Argentina's fiery President Cristina Fernandez, who calls the holdout funds "vultures" and has said she would never pay them.

The holdout creditors in this case include Elliott Management Corp affiliate NML Capital Ltd and the Aurelius Capital Management funds. Spokesmen for NML and Aurelius had no immediate comment or did not respond to a request for comment Tuesday.

Griesa's order on Wednesday came in response to an October 26 decision by the 2nd Circuit. The appeals court ruled then that Argentina violated bond provisions requiring that it treat bondholders equally when it paid the creditors who participated in the debt swaps ahead of the holdouts.

RISK TO THIRD PARTIES

The 2nd Circuit sent the case back to Griesa to have him address how the bond payment formula would work and determine how the court's injunctions would apply to third parties, such as Bank of New York Mellon Corp (BK.N), which acts as trustee for the exchange bondholders.

In its brief on Tuesday, Argentina said Griesa's order failed to address the 2nd Circuit's concerns about how the injunction would apply to third parties by "sweepingly" holding that it must bind them.

"It is unprecedented - and unwarranted - to hold liable as aiders and abettors participants in the financial markets doing no more than carrying out their normal business functions and fulfilling their own obligations to third parties," Argentina said in the motion.

The country said it would be "manifestly unreasonable" to apply the injunction to BNY Mellon. Once funds are transferred to BNY Mellon, Argentina said they are no longer the country's property and belong exclusively to the exchange bondholders.

Argentina also said allowing the order to remain standing would "both hugely impair the use of New York law to govern sovereign and corporate issuances and severely disadvantage New York financial institutions with respect to such issuances."

A spokesman for BNY Mellon did not immediately respond to a request for comment. The bank has said it does not believe it should be bound by the injunction.

A group of exchange bondholders on Monday filed a separate motion backing Argentina in seeking a halt to Griesa's order. Argentina said those bondholders "could not have anticipated this outcome."

"Had the exchange bondholders remotely understood that their contracts supported this extraordinary result, no one would have entered into an exchange offer in the first place," Argentina said.

The case is NML Capital Ltd et al v. Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.

(Reporting by Nate Raymond in New York; Additional reporting by Hilary Burke in Buenos Aires; Editing by Dan Grebler)