NEW YORK, Feb 8 (IFR) - Argentina bonds outperformed on Monday after two of six holdout investors agreed to a government offer last week to pay a total US$6.5bn to them.

Discounts and pars were up about half a point Monday afternoon at 117.00-118.00 and 64.50-65.00, respectively, after Dart Management and Montreaux Equity Partners - signed up to the government’s proposal.

Daniel Pollack, the special master presiding over the negotiations, said it “stood solidly behind the deal,” praising President Macri for addressing this “long-festering problem.”

US Jack Lew also reportedly chimed in over the weekend, voicing his support of the Argentine government’s efforts to cut a deal with holdout investors.

“All this points toward a fresh attitude on the side of important stakeholders and we think it can help Argentina’s negotiating hand,” Alejo Czerwonko, emerging markets economist at the chief investment office at UBS Wealth Management.

MORE WORK TO BE DONE

Yet while investors cheered progress on last week’s arduous negotiations in New York between government officials and litigant investors, the country still faces an uphill battle as it works to bring other holdouts on board.

Elliott Management and Aurelius Capital Management, the most high-profile funds in the sovereign’s 14-year old battle with holdouts, have yet to accept the offer.

It was their lawyers who won a pari passu case in US Courts in 2012, effectively prohibiting Argentina from paying existing holders of restructured debt unless holdout investors were made whole as well.

The subsequent pari passu injunction effectively forced the country to default for a second time in a decade as the former president refused to bow down to what she described as “vulture funds”.

Recently elected President Mauricio Macri has taken a more conciliatory approach to the litigant funds, realizing the importance of regaining access to vital hard currency funding.

In the offer announced Friday, the government said it would pay holders of defaulted bonds without a pari passu injunction 150% of their principal claim.

On the other hand, accounts covered by the pari passu injunction will receive 72.5% of their total claim or 72.5% of the amount they have been awarded in US courts if they accept the terms by February 19. Thereafter, they will only garner 70%.

The deal is conditional upon US Judge Griesa lifting the pari passu injunction that gives the likes of Elliott and Aurelius considerable leverage in negotiations.

It is also subject to approval by Argentina’s Congress, which will need to amend a lock law that prohibits the country from offering better terms than those given to participants in the 2005 and 2010 exchanges.

New terms, however, were thought unacceptable for certain funds like Elliott and Aurelius who because of the nature of their Argentine holdings are seeking greater claims on past due interest on which there is no judgment.

“Argentina bought Dart’s support by agreeing to pay its claim in full,” Mark Brodsky, chairman of Aurelius Capital Management, said in a statement.

“Aurelius would gladly accept such generosity, though we have always been willing to take a haircut.”

‘Me-too’ investors

With a clear offer on the table, a growing chorus of so-called ‘me-too’ investors holding defaulted debt are also clamoring for payment and complaining they have not been invited to participate in settlement negotiations.

For now, analysts think President Macri should have little trouble persuading what is now a more compliant Congress to agree to haircuts proposed in Friday’s deal.

“The proposed haircut of 27.5%-30% of the total claim for par passu injection holders is affordable, in terms of political cost, for the administration,” wrote Barclays analysts on Monday.

Barclays analysts speculated that Elliott and Aurelius may simply have kept quiet on Argentina’s recent offer, as a negotiating tactic.

If too many investors sign on to the deal, Congress may think the president has been too soft and hence force the government to return with a tougher deal, the UK bank said.

“For the pari passu injunction to be lifted, you need the major funds at the table,” said Sean Newman, a US based senior portfolio manager at Invesco, which holds Argentina exchange debt.

Newman sees an eight point upside on the discount bond if the injunction is lifted and past due interest starts being paid again. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)