Citibank Faces Legal Dilemma Over Argentina Bonds

The legal tussle between a group of New York hedge funds and Argentina has placed Citibank in a precarious position.

The New York Times has reported that a United States Court of Appeals has declined to rule on Citibank's appeal of Judge Thomas Griesa's July ruling which prevents the bank from making $5 million in interest payments to the holders of Argentine bonds.

According to Bloomberg, Citibank has been barred from making any payments on the bonds if Argentina continues to refuse to pay a group of hedge funds led by Paul Singer's Elliot Management Corp.

Argentina owes $1.5 billion to the hedge funds for debts bought during the nation's default in 2001.

Citibank has revealed that Argentina has threatened civil and criminal sanctions, including the possible nationalization of Citibank Argentina, if it fails to pass the interest payment to holders of the U.S. dollar-denominated bonds which were issued by the Argentine government. Payments are due on September 30 when the bonds are set to mature.

As the September 30 deadline looms, Citibank will have to decide if it will abide by Judge Griesa's ruling and face the consequences of violating its legal obligations to Argentine bond holders.

Citibank's lawyer Karen Wagner, in arguing for the appeals court to overturn Judge Griesa's ruling, warned that maintaining the injunction would cause an imminent catastrophe.

Wagner said that Citibank would follow whatever decision the appellate court makes.

Judge Reena Raggi, one of the judges who sat on the appeal panel, has been reported as saying Argentina is holding a gun to Citibank's head.

In a nationwide address on August 7, Argentine President Cristina Fernandez de Kirchner warned that Citibank "must comply with the country's laws."

According to Bloomberg, law makers in Argentina last week passed a statute to allow the country to pay its restructured debt locally, outside the jurisdiction of Griesa's court. Griesa has said that such a move would violate his rulings.

Argentina defaulted on a record $95 billion of debt in 2001. Holders of about 92 percent of the debt agreed to exchange their bonds for new ones at a discount of about 70 percent in two restructurings, in 2005 and 2010. Paul Singer and a group of other hedge funds refused the discounted payments, putting in motion a legal saga that has trapped Citibank in the crossfire.

Only time will tell how Citibank will deal with the payments on its Argentina bonds with just a few days before the September 30 deadline.

[Photo Credit: Juan Mabromata/AFP via Getty Images]