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(Adds economic and political context)
By Hugh Bronstein
BUENOS AIRES, June 20 (Reuters) - Argentine President Cristina Fernandez said on Friday her government would negotiate with all the country's creditors, in a bid to avoid default that sparked a market rally on hopes that the country's long debt-related court battles may soon end.
"We want to pay 100 percent of creditors," she said in a speech celebrating Argentine Flag Day. Local markets were closed for the holiday, but international bond spreads, which measure default risk, tightened sharply after she spoke.
Argentina is in a 12-year-old fight in the U.S. courts with holdout creditors, who declined to participate in a 2005 and 2010 revamp of debt securities in which more than 90 percent of holders accepted about a third of the original value of their bonds.
Until Friday Fernandez had refused to even consider talking to the holdouts, disparaging them for years as "vultures" out to take advantage of the country's 2002 sovereign default, which thrust millions of middle-class Argentines into poverty.
Gone was any harsh rhetoric in Fernandez's Friday remarks.
"Argentina is willing to have a dialogue," she said.
On Monday, the U.S. Supreme Court declined to hear an appeal by Argentina in its battle against the holdouts. This left intact a ruling by U.S. Judge Thomas Griesa in New York that threatened a new default by ordering the country to pay the holdouts at the same time it pays holders of restructured debt.
The next payment on restructured debt is due June 30. If Argentina does not make that payment on time it would have a 30-day grace period before falling into technical default.
"I have given instructions to our economy ministry for our lawyers to ask the judge (Griesa) to generate the conditions to be able to reach an accord that is beneficial and egalitarian for 100 percent of creditors," Fernandez said.
Argentine stocks trading in the United States surged on the news. The Bank of New York Argentine ADR index adding to its gains to rise more than 6.6 percent. However, for the week the index is only up 1.20 percent.
Argentine risk spreads were more than 100 basis points tighter at 715 over safe-haven U.S. Treasuries, according to the JP Morgan Emerging Markets Bond Index Plus, which as a whole stood at 284 basis points over Treasuries.
Fernandez is amply motivated to settle the dispute in order to finish her remaining year and a half in office without the financial tumult that would accompany a default. She is constitutionally barred from seeking a third term in the next presidential election in October 2015.
Leading candidates to succeed her say they would follow more investment-friendly policies than Fernandez, who has expanded the state's role in Latin America's No. 3 economy with heavy-handed currency controls, import barriers, high soybean export taxes and unpredictable curbs on corn and wheat shipments.
The impasse in the U.S. courts meanwhile has kept the South American grains exporting powerhouse from accessing the global bond market.
Foreign financing is needed to improve Argentina's farm infrastructure and stimulate its faltering economy as inflation soars and central bank reserves slump to eight-year lows of $28.5 billion.
That is not much considering the nearly $6 billion in debt payments the government faces this year and nearly $10 billion in 2015, according to the economy ministry.
On top of that, Argentine this year struck a $5 billion compensation deal with Spain's Repsol over the 2012 nationalization of its Argentine energy subsidiary YPF and agreed to pay $9.7 billion in overdue debt to the Paris Club of country creditors. (Additional reporting by Jorge Otaola and Sarah Marsh in Buenos Aires, Daniel Bases in New York; Editing by Chizu Nomiyama)