The move by Argentina follows a separate move by other creditors late Monday to also overturn the court order to pay the small group of bondholders who did not participate in the country’s 2005 and 2010 debt restructurings.

After a legal battle lasting nearly a decade, U.S. District Judge Thomas Griesa last week ordered Argentina to deposit money before Dec. 15 to pay the so-called “holdout” creditors who did not agree to the debt restructurings. About 93 percent of Argentina’s other bondholders participated in the plans.

While the legal battle continues, Fitch Ratings agency downgraded the country’s sovereign credit rating to “CC” from “B” on Tuesday. Fitch said it views an Argentine default as “probable” after the court decision.

The “holdout” investors sued to recover the full value of bonds that Argentina stopped paying in 2002, setting up a battle with the country’s left-leaning government, which branded them as “vulture funds” and has refused to pay them.

The funds got a major boost last month when a U.S. appeals court ruled Argentina must pay them in full when it services the restructured debt that most of the country’s other creditors grudgingly accepted. That deal included a painful “haircut” or writedown for investors of about 70 percent of the bonds’ value.

The litigation has kept the country out of global credit markets for the last decade and could spark a new debt crisis in Latin America’s No. 3 economy by jeopardizing payments on $24 billion of the restructured debt, Argentina’s lawyers argue.

They also say the latest rulings could undermine the ability of other governments to negotiate future debt restructurings.

In an emergency motion to the 2nd U.S. Circuit Court of Appeals late Monday, Argentina sought to suspend an order made by U.S. District Judge Thomas Griesa in New York last week, requiring that Argentina deposit the $1.3 billion in an escrow account by Dec. 15, when a roughly $3 billion payment comes due on Argentina’s growth-linked GDP warrants.

Argentina announced on Monday that it appealed the order and the court papers were made public on Tuesday.

The South American country said in its motion that the 2nd Circuit should delay Griesa’s payment order while it appeals other aspects of the case. It said forcing a payment to holdout creditors would destroy its debt restructuring and cause “extreme harm to numerous third parties.”

Prices for the debt issued in Argentina’s swaps – including Par and Discount bonds – have sunk by as much as 30 percent in the last month. At the same time, the cost of protection against an Argentine default has spiked higher.

Argentina said it could not comply with Griesa’s order under local law, which prohibits paying the holdout creditors on better terms than the bondholders who accepted the debt swaps, known as “exchange bondholders”.

Argentina also said it may not be able to service its restructured debt if Griesa’s order remains in place. The roughly 93 percent of bondholders who agreed to swap their defaulted bonds at a heavy loss now fear a “technical default” and some of them have appealed against Griesa’s ruling, too.

“The order for an immediate escrow under these threats is impossible to comply with and disregards the many third party interests involved as well as the Republic’s sovereignty,” Argentina said in the motion.

Kathryn Rooney Vera, Latin America strategist at Bulltick Capital Partners in Miami, said the court might be sympathetic to those third-party U.S. intermediaries.

“The third party entities will have more sway than Argentina, as you can tell from the official ruling,” she said. “The courts don’t care about Argentina and what they think, more about how this is going to affect the parties.”

‘AIDERS AND ABETTORS’

Griesa’s order issued last Wednesday was a setback for Argentina’s fiery President Cristina Fernandez, who has said she would never pay the “vulture funds.”

They include Elliott Management Corp affiliate NML Capital Ltd and the Aurelius Capital Management funds. Their spokesmen either had no immediate comment or did not respond to a request for comment on Tuesday.

Griesa’s order came in response to an Oct. 26 finding by the 2nd Circuit that Argentina violated bond provisions requiring it treat bondholders equally when it paid the creditors who entered the debt swaps ahead of the holdouts.

The 2nd Circuit sent the case back to Griesa to have him address how the payment formula would work and determine how the court’s injunctions would apply to third parties, such as Bank of New York Mellon Corp, which acts as trustee for the exchange bondholders.

In its brief on Tuesday, Argentina said Griesa’s order failed to address the 2nd Circuit’s concerns.

“It is unprecedented – and unwarranted – to hold liable as aiders and abettors participants in the financial markets doing no more than carrying out their normal business functions and fulfilling their own obligations to third parties,” it said.

The country said it would be “manifestly unreasonable” to apply the injunction to BNY Mellon. Once funds are transferred to BNY Mellon, Argentina said they are no longer the country’s property and belong exclusively to the exchange bondholders.

Argentina also said allowing the order to remain standing would “both hugely impair the use of New York law to govern sovereign and corporate issuances and severely disadvantage New York financial institutions with respect to such issuances.”

A spokesman for BNY Mellon did not immediately respond to a request for comment. The bank has said it does not believe it should be bound by the injunction.

A group of exchange bondholders on Monday filed a separate motion backing Argentina in seeking a halt to Griesa’s order. Argentina said those bondholders “could not have anticipated this outcome.”

“Had the exchange bondholders remotely understood that their contracts supported this extraordinary result, no one would have entered into an exchange offer in the first place,” Argentina said. DM

Photo: President of Argentina, Fernandez de Kirchner (Reuters)