US Judge Orders Argentina Debt Negotiations Must Continue

(Reuters) - Argentina's default this week did not "extinguish or reduce" the South American country's debt obligations, a U.S. judge said on Friday, and he ordered negotiations between the country and holdout investors to continue.

In a stern tone, U.S. District Judge Thomas Griesa in New York criticized the decision by Latin America's No. 3 economy to default on $29 billion in debt earlier in the week rather than pay the holdouts as ordered.

As Griesa was speaking, a committee facilitated by the International Swaps and Derivatives Association (ISDA) declared Argentina's failure to pay an interest payment a "credit event." The move triggers payment on insurance held on Argentine government debt, which analysts estimate could amount to roughly $1 billion.

Griesa chided Argentina for making statements only about its obligations to bondholders who took large writedowns after its $100 billion default in 2002, and not the rights of the New York hedge funds at the center of the dispute, which had rejected the bond swaps.

"What occurred this week did not extinguish or reduce the obligations of the Republic of Argentina," Griesa told a court hearing.

The federal judge said both parties had an "obligation" to continue cooperating with court-appointed mediator Daniel Pollack. The Buenos Aires government on Thursday called Pollack "incompetent."

Argentine bond prices, which earlier had extended Thursday's losses before holding steady, were largely unmoved by Griesa's comments. On international markets, Argentina's dollar-denomintated bond due in 2033 US040114GL81=R was down 4.000 points to a bid price of 84.184.The blue-chip Merval stock index .MERV was down 3.47 percent from Thursday's close at 7,903.67, while the peso currency traded fractionally weaker on the black market at 12.700.

The Argentine government maintains it has not defaulted because it made a required interest payment to a bank intermediary on one of its bonds. But Griesa blocked that deposit in June, saying it violated his ruling that Argentina settle its dispute with holdout investors first.

As a result, holders of $29 billion in Argentine bonds did not receive the interest coupon payment by a July 30 deadline.

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Before the hearing, Argentina's government had said it expected nothing favorable to come from Griesa, who it has previously called an "agent" of the New York hedge funds.

"We can't hold any positive expectations because (Judge Griesa) has always held the view of someone who is partial," Cabinet chief Jorge Capitanich told reporters in Buenos Aires.

Argentina had argued it needed to await the Dec. 31 expiration of a legal clause barring it from paying under better terms to the holdouts than those accepted by restructured debt holders before changing its negotiating terms, Faergemann said."The market is placing a very high probability on Argentina reaching an agreement with the holdouts within the next six months in which case ... the actual market impact could be short-lived," said Ander Faergemann, senior emerging debt fund manager at PineBridge Investments in London.

"In the best-case scenario, the Argentine government will find a middleman to pay out the holdouts in the near term to allow the sovereign to focus on paying the claim in January and continue servicing its other debts," Faergemann said.

Argentine banks had scrambled to put together a proposal to buy out the holdouts' non-performing debt and avert the default. That attempt at a deal collapsed in the final hours.

Some Argentine newspapers reported on Thursday that JPMorgan Chase & Co (JPM.N) and other banks might be involved in a private-sector deal with the holdouts to help resolve the default. A JPMorgan spokesman said the U.S. investment bank had "no comment".

Argentines already grappling with an economy in recession and one of the highest rates of inflation in the world took the default calmly, with many saying economic crises were the norm.