Argentina: Biased judge won't end debt standoff

Argentina said there was little hope of resolving its damaging debt dispute at a US court hearing Friday, accusing the judge of bias as repercussions from its partial default continued to mount.
The country needs to strike a deal with two US hedge funds whose legal battle against its debt restructuring has blocked it from paying bondholders who agreed to take a 70-percent write-down after its 2001 economic crisis.
But the government said it was pessimistic there could be any resolution at the hearing called by US District Judge Thomas Griesa in New York.
"We cannot have favorable expectations because he has always had a biased view," Argentine cabinet chief Jorge Capitanich told journalists in Buenos Aires.
He said the hearing would focus on the "payment process," referring to the $539 million transfer Buenos Aires made on June 26 to pay restructured debt holders.
That money has been blocked in a Bank of New York account, frozen by Griesa's ruling that Argentina cannot pay the 92 percent of creditors who agreed to a write-down without also paying the hedge funds the entire $1.3 billion it owes them.
Argentina says paying the holdouts in full could expose it to claims for up to $100 billion from exchange creditors, who are entitled to equal treatment under what is called a Rights Upon Future Offers, or RUFO, clause.
Sources close to the case say JP Morgan and other banks are in negotiations with the so-called "holdout" hedge funds to break the impasse by buying some or all of their bonds.
JP Morgan has declined to comment.
Argentina denies the situation amounts to a default, but ratings agencies have ruled otherwise.
Fitch declared Argentina in "restrictive default" Thursday, echoing the "selective default" declared Wednesday by Standard & Poor's.
Both terms indicate the country has defaulted on one or more of its financial commitments but continues to meet others.
Moody's for its part lowered its outlook on Argentine bonds to "negative," though it left its rating unchanged at "Caa1."
"Moody's considers that non-payment of debt obligations to creditors after a grace period has expired is a default," it said, adding that the standoff would likely deepen the country's recession, exacerbate unruly inflation and increase pressure on the peso.
Argentina blamed the United States on Thursday for its standoff with what it calls "vulture funds" after 11th-hour talks this week failed to resolve the years-long dispute.
Capitanich accused the judge of "incompetence" and said he was an "agent" of the hedge funds, and lashed out at the US government for failing to intervene.
- Stocks down -
World markets were shaken by the impasse.
Asian markets ended their recent rally Friday after the Dow posted its biggest single sell-off since February on the Argentine news and weak eurozone data.
In Argentina, stocks plummeted Thursday, closing 8.43 percent down as the repercussions of the default began to set in.
Argentina got a show of support from more than 100 economists, including Nobel laureate Robert Solow and other prominent academics, who sent a letter to the US Congress urging it to intervene.
"The district court's decision... could cause unnecessary economic damage to the international financial system, as well as to US economic interests (and to) Argentina," said the signatories, warning the ruling created a "moral hazard" by guaranteeing creditors full payment no matter how risky their investment.
Analysts said the damage could still be controlled if the default was fleeting, but warned a lengthy standoff would deepen Argentina's current recession, fuel inflation and unemployment, and further the country's isolation from global financial markets.
Argentina's 2001 default on $100 billion in foreign debt, the largest in history at the time, plunged the country into crisis. Rioting left 33 people dead after the government froze savings accounts to halt a run on the banks.
But analysts say the global impact of the new default will be far smaller, since Argentina has since been locked out of international capital markets.