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Argentine debt talks end without deal as default looms

By Daniel Bases and Jorge Otaola

NEW YORK/BUENOS AIRES (Reuters) - Several hours of negotiations between Argentine officials and holdout investors ended without a resolution, Economy Minister Axel Kicillof said in New York on Tuesday, just a day before the nation faces a possible default.

Kicillof left the meeting at the court-appointed mediator's office in Manhattan at about 11:20 p.m. EDT (0320 GMT), and though he said both sides would meet again Wednesday, the court-appointed mediator, Daniel Pollack, said in a statement that details of such a meeting had not yet been determined. If a deal is not reached, Argentina faces another default on its sovereign obligations.

"I cannot give information," Kicillof told reporters. "We are working."

Tuesday's meeting was historic in that it was the first time the opposing sides met for face-to-face talks. In a statement, Pollack said whether the parties will meet again Wednesday "remains to be determined overnight." Although the parties had a "frank exchange of views and concerns," the issues dividing them are still unresolved, he said.

NML Capital, a unit of Elliott Capital Management, and Aurelius Capital Management, the two hedge funds central to the legal battle, have said they are willing to negotiate a deal. They were awarded $1.33 billion, plus interest, by U.S. District Judge Thomas Griesa, who ordered Argentina to pay the holdouts at the same time as investors who agreed to restructurings in 2005 and 2010.

After a long battle in the U.S. courts, the South American nation is out of options: it has to either pay in full the hedge funds that rejected its restructuring on their defaulted bonds, cut a deal or win a stay of the court order that triggered the deadline.

According to bank sources and media, a group of private banks in Argentina is set to offer to put up $250 million as a guarantee to convince NML of Argentina's good faith and convince Griesa to reestablish the stay.

Argentina's isolation from global credit markets since its 2002 default on $100 billion means a default would be highly unlikely to cause financial turmoil abroad, but it would hurt a domestic economy already in recession.

Kicillof's appearance at the office of the court-appointed mediator presiding over the negotiations was his first in more than three weeks. The scant progress made in talks, and Kicillof's absence, had raised questions over Argentina's commitment to reach a settlement with the holdouts.

The minister, who this year brokered deals with the Paris Club of creditor nations and Spanish energy giant Repsol, made no comment to reporters staking out Pollack's office.

Hopes that Tuesday's meeting in New York would see an accord boosted sentiment on Argentina's blue chip MerVal stock index which reversed early losses to close up 6.5 percent.

A default had been looking increasingly likely over the past few days. Argentina's debt insurance costs hit six-week highs on Tuesday.

LEGAL JOCKEYING

For many years, the country declined to negotiate with the holdouts who bought its distressed debt on the cheap, slamming them as "vultures" picking over the carcass of its default.

But after a slew of defeats in the U.S. courts, tough-talking Fernandez has been forced to the negotiating table just as her government battles runaway inflation and reserves that hit an eight-year low this year.

Argentina has asked Griesa to stay his order for payment to the holdouts to avoid triggering a clause, known as RUFO, or rights upon future offers, that would cause it to sweeten the terms for bondholders who already accepted the restructuring.

Separately, holders of Argentina's euro-denominated exchange bonds earlier on Tuesday urged Griesa to facilitate a settlement by suspending his ruling.

The veteran judge previously rejected Argentina's request for a stay, but he could respond differently to bondholders.

The euro bondholders said they would facilitate a deal by waiving the so-called RUFO clause that prevents Argentina from offering other investors better terms than it offered them.

They would also try to get holders of exchanged bonds under other legislations to waive the clause. "Obtaining a waiver of the RUFO clause, however, will take time," they said.

In its latest legal maneuver, Argentina appealed a portion of an order from Griesa on Monday permitting Citibank to pay certain bond holders with funds deposited with the bank by the Argentine government.

The appeal appears to take issue with Griesa’s warning that his order permits Citi only to make the next scheduled payment on July 30 but not subsequent payments.

SPECULATORS

Various South American leaders on Tuesday rallied behind Argentine President Cristina Fernandez, castigating the holdouts as financial speculators menacing the entire region.

"The problem that's affecting Argentina today is a threat not just to a brother nation. It affects the entire international financial system," Brazilian President Dilma Rousseff said. "We cannot accept that the actions of a few speculators put the stability of entire countries at risk."

Christine Lagarde, the head of the International Monetary Fund, said on Tuesday that an Argentine default would unlikely prompt broader market repercussions given the country's relative isolation from the financial system.

Argentina's dollar-denominated Par bonds rose strongly on Tuesday on the over-the-counter market as investors who expected bondholders could accelerate the series in the case of a default and call for immediate payment piled into the paper.

"If there is a default, and given the Par is the cheapest series, they are acquiring these bonds," said Roberto Drimer at the local consultancy VatNet.

Par bonds closed up 2.3 percent at $51.05 while Discount bonds were down 1.2 percent to $82.55.

(Additional reporting by Svea Herbst-Bayliss in Boston, Jonathan Stempel in New York, Diego Ore and Deisy Buitrago in Caracas; Writing by Sarah Marsh and Richard Lough; Editing by Leslie Adler, Andrew Hay & Shri Navaratnam)

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