Citigroup plans to shut its custody business in Argentina after a US judge refused to lift an order that blocked the bank from making interest payments to investors holding $2.3bn (£1.5bn, €2.2bn) in Argentine bonds, reports said.
Citi's move may further complicate Buenos Aires' attempts to pay bondholders and return to the global debt markets, more than 13 years after its 2001 default on roughly $100bn of bonds.
Citigroup said its decision followed US District Judge Thomas Griesa's recent order letting the injunction stand, and Argentina's renewed threats to cancel its banking license and impose criminal, civil and administrative sanctions.
However, the New York-based bank has not decided on how it will exit the custody business. It could sell portions of the business or end some customer relationships.
Citigroup, on 17 March, called itself the victim of an "unprecedented international conflict of laws" and said its Argentine branch was making plans to close the custody business "as soon as possible".
The bank said it will continue to pursue "all legal remedies".
Citi also tried to downplay its decision to quit the custody business, saying: "As it is known by the markets and the public in general, the custody business, by its very nature, is one that has no meaningful connection with banking business in general, as it is limited to provide custody services on assets that are indisputable property of clients."
Most investors holding Argentine bonds swapped them for bonds worth much less, but a group of holdouts has rejected the swaps.
The holdouts, including billionaire Paul Singer's Elliott Management hedge fund and its NML Capital affiliate, as well as the Aurelius Capital Management hedge fund, have demanded they be paid in full if holders of exchanged bonds are paid.
Judge Griesa's repeated rulings in favour of the holdouts has prompted defiance from Argentina and President Cristina Fernandez, who has termed the holdouts as 'vultures' eyeing astronomical profits.
Fernandez cannot seek a third term, and her successor will assume office in December 2015.
Mark Weidemaier, a University of North Carolina law professor specialising in sovereign debt disputes, told Reuters: "...It now becomes a waiting game. [Griesa's] decision gives holdouts more leverage, but it might be that the current administration in Argentina is not interested in settling, and will hand the problem to its successor."
Capital Economics said in a 13 March note: "Judge Griesa's ruling that Citibank cannot process interest payments on Argentine government bonds that were issued under local law has dealt another blow to the authorities' bid to return to international capital markets.
"The ruling leaves the government with very few options to raise hard currency, which will limit its ability to pump economic growth ahead of October's general election."
On 12 March, Griesa ordered Citigroup not to process a $3.7m interest payment due on 31 March.
In his order, Griesa expressed sympathy for Citigroup, but said Argentina's defiance had triggered Citigroup's problem, and that any third party that helps the nation's payment process will violate his injunction.
Griesa also urged Argentina to work with court-appointed mediator Daniel Pollack to end its disputes with the holdouts.
The case is NML Capital Ltd versus Argentina, US District Court, Southern District of New York, No. 08-06978.