By Daniel Bases

NEW YORK, Feb 21 (Reuters) - A long-awaited showdown in a U.S. appeals court next week pits Argentina against a group of investors who refused to swap their debt after the country's historic 2002 default.

Argentina risks defaulting again, this time on $24 billion in restructured debt if it sticks to a vow never to comply with orders to pay so-called "holdouts" but still tries to pay the vast majority of investors who exchanged their bonds in 2005 and 2010.

Buenos Aires calls the holdouts vultures for buying the debt at a steep discount and then demanding full payment in the aftermath of the country's crippling economic crisis. The holdouts, led by NML Capital Ltd, an affiliate of hedge fund Elliott Management, and Aurelius Capital Management, counter that they're just trying to hold Argentina to its obligations and that the country has plenty of reserves to pay them.

The decade-old case has been closely followed by emerging markets investors, as the holdouts so far have managed to collect little despite winning billions in prior court judgments.

The court fight also has drawn in the U.S. government, which has filed a friend-of-the-court brief arguing that a ruling against Argentina could make it much harder for countries facing financial distress to get creditor support for crucial debt swaps.

The 2nd U.S. Circuit Court of Appeals in New York will hear new arguments in the case on Feb. 27.

The appeals court in October upheld a lower court's order that Argentina should pay $1.33 billion to the holdouts because the country violated the "pari passu" terms of its bond contracts requiring that investors be treated equally.

The appeals court has frozen that payout order for now, while it takes another look at the case. The appeals judges are scrutinizing the specific payment formula outlined by U.S. District Judge Thomas Griesa and how third parties, such as Bank of New York Mellon, the trustee for Argentina's restructured debt, would be affected by the payout plan.

Given the records of the two sides over the past 10 years, the appeals court's ultimate decision may not resolve the matter. Many experts predict the case could end up before the U.S. Supreme Court, though even then the high court would be unlikely to issue a final ruling until at least 2014.

PAY UP OR DEFAULT

The 2nd Circuit is set to hear nearly an hour's worth of arguments in the case, with lawyers for Argentina and the holdouts squaring off against one another.

The court also allotted time to lawyers for BNY Mellon and the bondholders who participated in the debt exchanges. Both have supported Argentina in its appeal, with the exchange bondholders saying holdouts should not be treated better than "innocent" creditors who took part in the swaps.

Legal experts and market analysts expect the appeals court will uphold - at least in part - the lower court's findings that holdouts are due 100 percent of what they are owed at the same time exchange bondholders get 100 percent of their coupon payments on restructured debt.

If the payout plan is upheld or modified only slightly, Argentina could find itself in a corner given prior declarations it will never pay holdouts.

That could also leave BNY Mellon, as the trustee for Argentina, in a tough spot. If BNY Mellon is ordered not to pay the exchange bondholders unless the holdouts are paid simultaneously, that could open the custody bank to a barrage of lawsuits from exchange bondholders angry they aren't getting their money.

Given Argentina's history of refusal to pay holdouts, the government could to try to circumvent the U.S. banking system and pay the exchange bondholders without paying the holdouts too.

However, Argentina's tough currency and capital controls make money transfers difficult and that too may constitute a default.

In the unlikely event Argentine President Cristina Fernandez decides to pay everyone by Griesa's formula, she still would have a major task ahead.

Fernandez would need to get the legislature to scrap or rewrite a law forbidding outright payment to holdouts or making a payment on better terms than those exchange bondholders received. That law, known as the Lock Law, also bars the reopening of the swaps without legislative approval.

Sources with knowledge of Elliott's thinking say the $20.7 billion hedge fund would discuss a settlement, but not on 2005 and 2010 exchange terms. An Elliott spokesman had no comment.

Holdout investors might get a pyrrhic victory from the 2nd Circuit if its view of the equal treatment violation of the debt contract is pinned more narrowly on the Lock Law.

Legal experts say this would allow the court to say Argentina broke the contract and must pay. However, instead of an injunction, the order would be in the form of a judgment, thereby limiting the threat to intermediary banks.

Follow us on Twitter @ReutersLegal | Like us on Facebook