(Adds negotiation prospects in sixth paragraph)
By Joseph Ax, Daniel Bases and Nate Raymond
NEW YORK, June 18 (Reuters) - Argentine officials will seek next week to negotiate for the first time with hedge funds that refused to take part in its debt restructuring, a lawyer for the country said in Manhattan federal court on Wednesday, potentially bringing the country closer to resolving a years-long legal battle.
"I've been informed by Argentina that the authorities will be in New York next week and want to negotiate with the holdouts," said Carmine Boccuzzi of Cleary Gottlieb Steen & Hamilton at a hearing before U.S. District Judge Thomas Griesa in Manhattan.
Griesa had ordered Argentina to pay the holdout funds $1.33 billion at the same time it pays bondholders who participated in the 2005 and 2010 restructurings of Argentina's $100 billion of bonds. The restructured bond holders are due a payment on June 30. If the payment isn't made, Argentina would enter a technical default on the restructured debt.
Any meeting between the hedge funds and Argentine officials would be their first and could herald the beginning of the end of one of the longest-running sovereign debt crises in recent memory. It has kept the country from accessing international capital markets since defaulting on $100 billion in debt in 2001-2002.
The negotiations would be part of an attempt by the country to avoid default, though Boccuzzi said "an exchange offer is not happening at this time."
The two sides have been brawling in court for years, potentially leading to contentious negotiations. At Wednesday's hearing, a lawyer for hedge fund NML Capital, Robert Cohen of Dechert, said Cleary lawyers had made "obviously untrue" representations to Judge Griesa at a hearing earlier this month, when Jonathan Blackman and Boccuzzi told Griesa that Argentina was not planning a restructuring to evade U.S. court orders.
The developments follow a Tuesday speech in Buenos Aires by Economy Minister Axel Kicillof, who said Argentina is taking steps so it can continue paying the vast majority of bondholders who agreed to a debt restructuring in the last several years - without paying the holdouts.
The holdout investors are led by NML Capital Ltd., a division of billionaire Paul Singer's Elliott Management Corp., and Mark Brodsky's Aurelius Capital Management.
Cohen asked the judge to order Argentina not to follow through with Kicillof's plan, which would involve paying the restructured bondholders through Argentina law.
"We have been prepared to negotiate with Argentina since this matter began,'' Cohen said. ``We need an order, your honor, that makes it impossible, or as impossible as we can make it, to do the plan they have announced.
``This is not hypothetical. It is happening as we speak and we need to stop it."
Griesa agreed, and said he would enter an order finding that the finance minister's proposal violates his orders.
"The mechanism of the sort proposed by the finance minister would be a violation of the procedures and orders of the court," Griesa said on Wednesday.
Argentine President Cristina Fernandez has labeled the holdout investors "vultures" for picking over the carcass of the broken economy in the wake of the 2001-2002 default. In a televised address to the nation on Tuesday she said Argentina was the victim of "extortion" by the holdouts, but that she was still open to negotiations and insisted she would continue to pay the more than 90 percent of creditors who accepted the restructuring terms in 2005 and 2010.
Griesa criticized Fernandez for using the word "extortion" in her speech.
"That really does not give me confidence in a good faith commitment to pay all the obligations of the republic," Griesa said in court. "The president's speech is a problem."
Boccuzzi played down the president's remark.
"She was not saying on June 30 let's open a cash window someplace outside the court's jurisdiction and pay these folks," he said.
A spokesman for NML did not immediately respond to a request for comment on settlement talks, while an Aurelius spokesman had no immediate comment.
The U.S. denominated discount bonds due in 2033 were lately traded at 72.6 cents, down more than 10 cents since Friday, but recovering most of the day's losses after the government said it would negotiate. The yield was lately at 12.41 percent, according to Thomson Reuters data.
On Monday, the U.S. Supreme Court declined to hear an appeal by Argentina in its battle against the hedge funds which refused to take part in its debt restructuring. This left intact Griesa's ruling ordering the country to pay the holdouts.
As a result of the Supreme Court's decision, the 2nd U.S. Circuit Court of Appeals in New York formally lifted the stay it had placed on Griesa's injunction that bars payment to exchange bondholders via the U.S. banking system unless holdouts are paid at the same time. That means Griesa's order that Argentina pay all the bondholders at the same time, including the $1.33 billion to the holdouts, is now in effect.
"It would be in the interest of Argentina to be pragmatic and close this chapter," said Alberto Ramos, an analyst at Goldman Sachs, before the hearing began. "This would open access to external funding and would protect the economy."
A technical default would not occur immediately on June 30 because the government has a grace period of 30 days before such a determination can be made.
"Notwithstanding the high uncertainty remaining, the government's open recognition that discussions with Judge Griesa are becoming a critical element for a permanent solution could be a welcome development," wrote credit analysts at Deutsche Bank, before the hearing began.
The increased concern of default has boosted the cost of insurance against such an occurrence. The annual cost of insuring $10 million of Argentina's debt from default for five years rose to 2805 basis points on Wednesday, but after the hearing fell to 2173 basis points, according to Markit.
Argentina's Merval stock index gained 2.9 percent Wednesday, rallying for a second day following a 10 percent drop on Monday. For the year, the index has been a stellar performer, rising 43 percent, and hit an all-time record last week.
Argentina has just $910 million of net notional amounts of CDS contracts, up from a low of $750 million reached in December 2013, according to data from the Depository Trust & Clearing Corporation. By comparison, Brazil has more than $17 billion.
The case is NML Capital Ltd et al v. Argentina, U.S. District Court for the Southern District of New York, No. 08-6978. (Reporting by Joseph Ax, Nate Raymond, Alexandra Ulmer, Alison Frankel and Daniel Bases; additional reporting by Carolyn Cohn and Sujata Rao-Coverley in London. Editing by Chizu Nomiyama, Jonathan Oatis and John Pickering)