Argentina's government attorney Carmine Boccuzzi (C) and other lawyers leave the US Federal Courthouse August 21, 2014 in New York
New York (AFP) - US judge Thomas Griesa on Thursday branded Argentina's move to pay bondholders against his orders "illegal", but he held back from ruling the country in contempt of court.
He demanded that Argentina not carry out the new plan, aimed at evading his freeze on a June bond payment, but added that, "In my judgment, it does not add to the scales of settlement to make a finding of contempt."
Hedge funds who won their case against Argentina over defaulted bonds in Griesa's court had asked the New York federal judge to declare the country in contempt after President Cristina Kirchner unveiled the new tactic on Tuesday.
Argentina refuses to pay the hedge funds the full $1.3 billion value of their bonds, arguing that the two so-called holdouts lost their claim when they refused to join the restructuring of the nearly $100 billion in debt the country defaulted on in 2001.
But Griesa has said the country cannot pay interest on the restructured bonds unless it also pays the hedge funds, Aurelius Management and NML Capital.
That has resulted in Argentina falling into default again at the end of July, after the Bank of New York Mellon froze the country's $539 million interest payment on Griesa's orders.
On Tuesday Kirchner revealed a new move, proposing to pay restructured bondholders via an Argentine bank, sparking a new complaint by the hedge funds who requested Griesa to rule the country in contempt.
Robert Cohn, an attorney at Dechert LLP representing NML, told Griesa Thursday that Argentina's "blatantly defiant actions" required a finding by the court of contempt to send a message, not only to Argentina, but to creditors who may be amenable to Kirchner's plan.
"They need to know this court is prepared to act harshly with anyone who would violate the court's orders," Cohn said.
Cohn said sanctions could be imposed following a contempt order, putting pressure on the country that might lead to settlement.
"Otherwise the Republic will feel no compulsion to deal with this problem," he said.
Carmine Boccuzzi, a Cleary Gottlieb attorney representing Argentina, argued that contempt finding would be "harmful and deleterious" to any attempt to settle.
"It would only be further gasoline on that fire," said Boccuzzi.
He added that Kirchner's proposal still needs to win approval in the legislature and is still "many steps from any conduct that would violate your honor's order."
Griesa expressed sympathy for the plaintiffs Thursday, saying Argentina has "spent years" advocating a "lawless" position.
"I want to be very clear, this proposal is a violation of the current orders of this court... it is illegal and the court directs that it cannot be carried out," he said.
But a contempt ruling would not help to move ahead talks to find a compromise in the long-running dispute.
"If we can have a process leading to settlement, that is the path that should be taken," the judge said.
A "settlement is what's got to come, somehow, someday," the judge said.