On Dec. 2, Argentina is scheduled to make a $42 million interest payment to some bondholders who exchanged defaulted sovereign debt for new bonds in one of the country's restructurings in 2005 and 2010. Exchange bondholders are due another $3 billion on Dec. 15 and between $100 and $200 million on Dec. 31. Argentina's highest officials, including its president and finance minister, have vowed to make those payments, despite a ruling last month by the U.S. Court of Appeals for the 2nd Circuit that under the equal footing provisions of Argentina's contracts with sovereign debtholders, the country can't pay exchange bondholders before it pays the distressed debt funds that refused to participate in Argentine restructurings.

Those proclamations are an affront to U.S. courts, District Judge Thomas Griesa said at a hearing Friday in federal court in Manhattan. And considering that Argentina agreed to submit to the jurisdiction of New York federal courts when it entered contracts with bondholders, Griesa said, the country is playing with fire if it continues to defy the directives of those very courts. Griesa has presided over years of litigation between Argentina and the distressed debt (aka vulture) funds, including NML Capital and Aurelius. He's entered billions of dollars of judgments for the vulture funds, only to see Argentina steadfastly refuse to pay up. On Friday, for the first time that I can remember, Griesa did more than express frustration with the recalcitrant republic. According to a transcript of the hearing, the judge flat-out threatened Argentina.

"If -- and I emphasize if -- there is any thought on the part of the Republic to defy and evade the current ruling, then that thought should be seriously reconsidered and set aside," Griesa said. "If it turns out as a fact that the Republic has some intention of evading the Court of Appeals ruling, our courts are not helpless. I think the Republic should realize that the record of defiance of judgments already entered is ... beginning to be viewed very negatively, and that is certainly evidenced in the Court of Appeals discussion. And steps can be taken, which I will not try to discuss now, but steps can be taken to sanction any misconduct by the Republic of the kind I am talking about, which will not simply amount to allowing the Republic to disobey judgments and rulings. There will be means of dealing with that."

As an initial matter, the judge said, he will decide whether to continue a stay of his rulings from earlier this year, which enjoined Argentina from paying exchange bondholders before the distressed debt funds. Argentina's lawyer, Carmine Boccuzzi of Cleary Gottlieb Steen & Hamilton, argued that the 2nd Circuit's opinion isn't the last word on the equal footing matter, since Argentina has already requested en banc review and can proceed to the Supreme Court if that's denied. NML's lawyer, Theodore Olson of Gibson, Dunn & Crutcher, pointed to Griesa's original stay order, which said that the stay would remain in place until the 2nd Circuit issued a mandate. Olson said the stay should be lifted before the December bond payments are due so that Argentina can't pay exchange bondholders without also paying his client and other distressed debt funds.

Griesa left the question open and ordered immediate briefing, to be completed by the end of the month, on how much Argentina must pay the vultures in connection with the scheduled December payments to exchange bondholders. After the briefs are in, he said, he'd entertain NML's motion to lift the stay.

The judge said he'd also consider briefs by exchange bondholders, though he took exception to an assertion by Sean O'Shea of O'Shea Partners, who represents a group of exchange bondholders, that his clients were "being held hostage" by the 2nd Circuit's ruling. Standard & Poor's downgraded Argentine debt after the appellate decision; the downgrade, in turn, led to a decline in the market value of the exchange bonds. O'Shea argued that if Griesa lifts his stay and the injunction takes effect, exchange bondholders will suffer.

If that's true, Griesa replied, bondholders should blame Argentina, not him or the 2nd Circuit. "The Republic doesn't have to stop paying the exchange," the judge said. "They don't have to stop for a minute, as long as they make a payment, an appropriate payment, to the plaintiffs. Now, if you want to get the exchange people paid, talk to the Republic."

Overall, Griesa seemed invigorated by the 2nd Circuit's affirmance on the equal footing clause. He was downright feisty with Argentina counsel Boccuzzi, who offered indirect answers to the judge's direct questions about whether Argentina intends to disobey the 2nd Circuit's directive. "Now, if we have the president of Argentina and the minister of the economy saying that that will not be complied with, that is a serious matter," Griesa told the Cleary lawyer. "I want to address that now, and the court is not helpless in dealing with such positions if they are taken."

Boccuzzi said that the Argentine officials were simply trying to calm the market and were not "thumbing their nose at Your Honor or the orders." Argentina merely intends to litigate the equal footing issue to the highest possible court, he said.

Griesa replied that Boccuzzi's assurances didn't match the quoted declarations of Argentine politicians. And considering his long experience with Argentina, he said, he has reason to doubt the country's intentions. For years, Griesa complained, Argentina has enjoyed the service of U.S. courts, yet it has refused to abide by rulings against it. This time, Griesa said, the courts weren't going to stand for defiance.

"Consequently, I would hope that the Republic will get back on the track ... of litigating fairly in our courts," the judge said, "and certainly, as to this new ruling, (will make) sure that it is complied with and that there is no doubt about compliance with it." Griesa told Cleary that he wanted Argentina itself -- not just the law firm -- to submit an affidavit verifying that it would comply with his ruling on the stay order. Boccuzzi said he would obtain that affirmation.

The war of words between Argentina and the distressed debt funds, meanwhile, continued Monday with an open letter to Paul Singer, the principal of NML's parent, Elliot Capital, from Argentina's ambassador to the United States. "Mr. Singer and friends: we Argentines have confronted you for some time, especially this year, and we will continue to do so," the letter said. "The entire world is watching ever more closely how this confrontation will evolve: a confrontation between a law-abiding country and government that honor their debts and pay them as they are due, and a group of speculators who insist on flapping their wings like vultures. Yet things are changing. The vultures no longer soar over a moribund Argentine economy, and the rest of the world is becoming aware that, in order to recover from the crisis, it needs real investors and entrepreneurs. Not vultures."

That sounds pretty defiant to me. There's less than a month to go before Griesa decides whether to lift the stay on the injunction barring Argentina from paying exchange bondholders. If this letter is any indication, Argentina isn't disposed to pay the distressed debt funds, regardless of the judge's decision. We may yet get a chance to see exactly what Griesa has in mind as a sanction.

Argentina counsel Boccuzzi didn't return my call for comment and a representative of Elliot Capital declined to comment.

(Reporting by Alison Frankel)

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