Argentina is fighting an October ruling by a U.S. federal appeals court that would force the government to pay holdout creditors holding bonds that have been in default since 2002. It is due to present papers by midnight.
The U.S. 2nd Circuit Court of Appeals in New York last month ruled that Argentina discriminated against bondholders who refused to take part in two debt restructurings as the nation tried to recover from a $100 billion (63 billion pounds) default a decade ago.
The ruling sparked fears that U.S. courts could ultimately inhibit debt payments to creditors who accepted terms of the restructuring, out of consideration for investors who rejected Argentina's terms at the time.
This would trigger a technical default.
The appeals court, however, referred the case back to the U.S. District Court to address the technical questions of just how debt payments would be calculated and how to treat the involvement of third-party banks such as Bank of New York Mellon, which act as transfer agents for money owed to exchange bondholders.
Argentine President Cristina Fernandez said recently her country will not pay "one dollar to the vulture funds," her term for the holdout investors who buy distressed or defaulted debt and then sue in international courts to get paid in full. Fernandez has vowed to keep making payments to other creditors.
State news agency Telam said the government would argue that the repayments were "immune to U.S. law" because "the payment of creditors is conducted outside that country."
"When the money arrives in New York, it already belongs to the creditors, not to Argentina," it quoted an unnamed official source as saying.
Argentine bonds closed up 1 percent on average in over-the-counter trading in Buenos Aires on Friday, after accumulating a loss of 4.1 percent in the previous three sessions.
"The move by Argentina put a floor under debt prices, because if it works it could create a buying opportunity," said Ruben Pascuali, a trader at local brokerage Mayoral Bursatil.
TELL US WHAT TO DO
Bank of New York Mellon, which transfers funds from the Argentine government to the country's bond holders, argued in a brief filed late on Friday to U.S. District Court Judge Thomas Griesa that it is not an agent of the Argentine government and maintains an "at arm's length" relationship.
The bank said its "duty of loyalty runs to the Exchange holders," that is, to enforce the rights of investors who exchanged their bonds in 2005 and 2010.
"Punishing an innocent third party to try to obtain compliance from an enjoined party goes beyond any legitimate purpose for contempt," BNY Mellon said.
The bank said it could be put between a rock and a hard place if Griesa rules they are to make payments to all parties but are prohibited because Argentina doesn't transfer any money through it.
"BNY Mellon will face a potential conflict between its obligations to Exchange Holders under the Indenture and its obligations to the Court," the bank argued.
In that case, the bank said, it needs guidance from the court on what its duties and responsibilities would be.
Ultimately, the bank wants the lower court's order from Griesa, which currently has all payments halted, to remain in place until the full appeals process has run its course.
That means after Griesa addresses the two technical questions set by the appeals court, BNY Mellon wants him to keep the payments frozen until the 2nd Circuit reviews and rules on his logic.
The deadline for parties to present their positions to Griesa is Friday at 11:59 p.m. EST (0459 GMT, Saturday). The judge is expected to make a speedy response given Argentina is due to start making $3.3 billion worth of payments to exchange bondholders starting December 2. Griesa's ruling will automatically return to the appeals court for review.
In a court filing this week, Elliott Management Corp's NML Capital Ltd and two Aurelius Capital Management funds urged Griesa to lift his February 23 stay on payments pending appeal.
October's ruling by the appeals court largely upheld injunctions issued in February by Griesa in favour of the holdouts, which own roughly $1.4 billion of defaulted debt.
The holdouts warned in their argument to Griesa that terms of the swapped Argentine bonds may allow the country to circumvent the United States by using subsidiaries in London and Luxembourg to make debt payments.
Weighing in on the arguments before the deadline were other transfer agents, holdout investors and exchange bond holders.
The Clearing House Association, a banking association and payments company, sent a letter directly to Griesa explaining that any order should not apply to beneficiary's banks, funds-transfer systems or other parties in a funds transfer.
The letter was obtained from a source with direct knowledge of the case. It argued the ruling would cause "disruption of payment systems and delays in processing legitimate payments" made by Argentine entities that have nothing to do with the case.
Law firm Duane Morris, representing roughly 100 mainly Italian holdout investors with approximately $165 million in principal and pre-judgement interest, sided with NML.
"Despite its proclaimed ability to pay, Argentina has steadfastly refused to make payments that are due under the defaulted bonds - even to the individuals who are not "vultures," Anthony Costantini, a lawyer with Duane Morris wrote in a brief to Griesa on Friday.
On the other side are bond holders who participated in the exchanges who urged that NML not be allowed to collect on its judgments.
Fintech Advisory Inc, a New York investment management firm that gave up $698.9 million of the $1.052 billion it was owed by Argentina during the two debt swaps, argued if the judge sided with the holdout bondholders, Argentina would be in breach of contracts with exchange bondholders like itself.
"There is no basis for any order to cause such a result," Fintech's lawyers wrote.
(Additional reporting by Jorge Otaola in Buenos Aires and Nate Raymond in New York; Writing by Helen Popper and Daniel Bases; editing by Theodore d'Afflisio, David Gregorio and Todd Eastham)