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US judge seizes Argentine central bank funds to compensate bondholders

Published:Wednesday | April 14, 2010 | 12:00 AM

Argentina says it will file a court appeal after a United States federal judge ruled a week ago that bondholders can seize US$105 million in Argentine central bank deposits held in the United States.

A bank spokesman told The Associated Press that Argentina was optimistic because similar rulings had been overturned.

The decision on April 7, nevertheless, drove down Argentine bond prices just as the cash-strapped government prepares a US$20 billion debt-swap offer in hopes of satisfying the bondholders and ending the lawsuits.

Argentina has been in a seemingly endless legal battle with bondholders who refused to accept about 30 cents on the dollar for debt they bought before the country's record US$95 billion default in 2002.

US District Court Judge Thomas Griesa in New York said Argentina is willfully defying its legal obligations and "has thus enmeshed the court in years of wasteful litigation with no end in sight".

Lacking independence

More threatening for Argentina is the basis for his ruling: that President Cristina Fernandez has proven through her actions that the country's Central Bank lacks independence.

That could expose Argentina's funds to other seizures and increase the perception around the world that the country is a risky place to invest.

The judge issued the order at the request of the hedge fund firm Elliott Management Corp and an affiliated company, NML Capital Limited. A spokesman for NML Capital said he would have no comment.

"This case got a lot more complicated when the government decided to use central bank funds to pay off its debt," said Adrian Rozanski, a consultant with Delphos Investment in Buenos Aires.

"It was the government's fault for linking the central bank balances with the national treasury."

After rising 20 per cent in anticipation of a successful settlement, Argentine bond prices fell about 3.0 per cent Wednesday, Rozanski said.

He attributed the drop in part to profit-taking and other factors in global bond markets, but said there are also fears similar rulings may come and hurt the debt swap that Argentina hopes will resolve its foreign debt problems.

- AP