Cristina Fernández de Kirchner risks further alienation from international lenders after bypassing judgment of New York court

This article is more than 6 years old

This article is more than 6 years old

Argentina has risked deepening its isolation among international lenders with a proposal to cut out a group of US hedge funds from sovereign bond payments.

President Cristina Fernández de Kirchner announced on Tuesday that the government was replacing its New York intermediary bank with the state-run Banco de la Nación.

This would allow it to circumvent a New York judge's ruling that blocked bond payments to all creditors, after the country refused to reimburse a group of hedge funds which are demanding payment of their bonds in full.

The new plan would allow Argentina to pay the so-called haircut bondholders who agreed to restructure their payments in 2005 and 2010 but have been unable to receive payments since the court ruling.

The bond market meanwhile reacted negatively to the proposed change in jurisdiction, which the New York court may see as an attempted evasion of its decisions.

Argentina's portion of the JP Morgan Emerging Markets Bond Index Plus widened by 22 basis points to 786 over US treasuries, marking an increase in risk perception.

Argentina's plan for making payments on its sovereign bonds via a local bank aims to protect the vast majority of creditors who participated in two debt restructurings, the government said.

The deadlock has kept the economically ailing country from being able to issue international bonds at a time of falling central bank reserves.

Argentina slid into default on its restructured bonds last month after a New York court blocked an interest payment of $539m (£324m). The payment did not go through to investors because US district judge Thomas Griesa says restructured bonds cannot be paid unless the holdouts get paid at the same time.

The $539m remains with intermediary Bank of New York Mellon. Argentina says Griesa overstepped his bounds by blocking the coupon payment, and is moving to ensure future payments go through local banks.

"The point is to protect the 92.4% of bond holders who participated in the exchanges," said the government's cabinet chief Jorge Capitanich.