Argentina has deposited the next payment needed to avoid a default on its restructured bonds, but a U.S. federal court decided on Thursday not to let the payment go through.
Both actions increased the stakes in a 12-year legal chess game between Argentina and creditors who refused to accept the downgraded terms offered by the country's 2005 and 2010 debt restructurings and are suing for full repayment.
Argentina will have the month of July to negotiate with its holdout creditors before falling into technical default. The next payment is due on Monday, but with that payment blocked by the courts, Buenos Aires will have a 30-day grace period to strike a deal with the holdouts.
If it fails, Latin America's No. 3 economy would be pushed into another painful default at the end of next month.
Economy Minister Axel Kicillof said Argentina owes an $832 million coupon payment on restructured bonds on Monday.
"Of that total, $539 million was deposited in the accounts ... of the Bank of New York Mellon at the Central Bank of Argentina," Kicillof said, adding that the rest of the $832 million had been deposited by way of other financial institutions.
"We affirm our commitment to honor our debt to all creditors," he said.
In order to pay holders of the country's restructured bonds, Argentina needed a stay to be issued by U.S. District Judge Thomas Griesa in New York because he had ordered earlier that Argentina was not to make payments without paying the holdouts at the same time.
Griesa denied Argentina's stay request about an hour after Kicillof said the deposit had been made.
Griesa scheduled a hearing for 10:30 a.m. EDT (1430 GMT) on Friday after getting a letter from the holdouts referencing the deposit and asking him to "address this violation of this court's order."
Griesa has ordered Argentina to pay the holdouts $1.33 billion plus accrued interest, at the same time it pays the 93 percent of bondholders who accepted the 2005 and 2010 restructurings. Argentina has said it cannot afford to pay so much to the holdouts and asked Griesa for a stay on that order, which would have allowed Monday's coupon payment to go through.
PAYMENT CRUNCH
Argentina's debt servicing costs are set to more than double in 2015 as it's economy stagnates, inflation soars at about 30 percent and foreign reserves slide to critically low levels.
Central bank reserves, which fell 30 percent last year and stand at eight-year lows of about $29 billion, are seen falling in the second half of 2014 after Argentina's main farm exports, soy and corn, are harvested and sold.
But Argentina's financial markets slipped only slightly on the news of Griesa's rejection, as investors bet that the country would use the 30-day grace period to strike a deal with the holdouts.
The restructured bonds, stemming from Argentina's $100 billion 2002 default, offer less than a third of the original value of the debt. The holdouts have sued in the U.S. courts to be repaid 100 cents on the dollar.
The debt drama is being played out in New York this week, where Griesa's order includes an injunction against Bank of New York Mellon and other payment agents from transferring money from Argentina to its restructured bondholders.
Also in Manhattan, lawyers for the holdouts and Argentina raced against the clock to clinch a deal for settling the 7 percent of defaulted bonds that were not restructured.
Griesa appointed a mediator to oversee the talks.
(By Hugh Bronstein; Additional reporting by Eliana Raszewski, Alexandra Ulmer and Jorge Otaola in Buenos Aires and Baniel Bases and Nate Raymond in New York; Editing by James Dalgleish, Leslie Adler, Tom Brown, Toni Reinhold)