The U.S. judge in charge of Argentina's debt default case ordered Bank of New York Mellon to hold on to money deposited by the government rather than disburse the funds to holders of the country's restructured bonds.
The move by U.S. District Judge Thomas Griesa came after Argentina earlier in the day demanded the intermediary bank deliver $539 million in bond payments that were due in June but blocked by previous court rulings.
Argentina defaulted on its sovereign bonds last week after losing a long legal battle with hedge funds that rejected the terms of debt restructurings in 2005 and 2010.
The government has kept up pressure on Bank of New York Mellon to make payouts to the holders of restructured bonds despite Griesa's order saying it has to pay the holdout hedge funds at the same time. The holdouts are asking for repayment of 100 cents on the dollar rather than accept steep discounts offered in Argentina's two restructurings.
"The Republic will seek to hold BNY Mellon liable for any damages the Republic has suffered and may suffer as a result of BNY Mellon's acts and omissions," the government said in a letter to the bank on Wednesday.
"BNY Mellon has placed its interests, and those of the plaintiffs ... over those of the Exchange Bondholders, in violation of BNY's duties as Trustee," the letter said.
Griesa disagreed, saying it was illegal for Argentina to deposit money intended for the exchange bondholders and ordered the bank to hold the funds.
"Argentina will take no steps to interfere with BNY's retention of the funds," Griesa's order said.
The inflation-racked South American country defaulted on about $100 billion on sovereign bonds in 2002. Most holders of those bonds accepted less than 30 cents on the dollar in the 2005 and 2010 restructurings while the holdouts opted to sue in the U.S. courts for full repayment.
The case has turned into a bitter legal feud between the populist government of Argentina and the holdouts, derided by Buenos Aires as vultures circling the carcass of Argentina's traumatic 2002 debt crisis.
Griesa stepped in on Monday to defend the mediator he appointed to help settle the dispute after Argentina accused the go-between of bias.
The country's gross domestic product, meanwhile, is expected to shrink this year, according to the United Nation's body for Latin America, as fallout from the debt crisis keeps the region's No. 3 economy out of foreign debt markets.
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