(Adds Argentine government statement)
By Nate Raymond and Daniel Bases
NEW YORK, Nov 10 (Reuters) - A U.S. judge ruled on Monday that Citigroup Inc could process an $85 million interest payment by Argentina on bonds issued under its local laws following its 2002 default.
U.S. District Judge Thomas Griesa in New York said Citigroup could process the Dec. 31 payment it receives on U.S. dollar-denominated Argentine law bonds.
The judge also called off a Dec. 9 hearing over whether the bank could regularly process payments Argentina makes on the bonds. The briefing will be deferred into 2015.
Griesa's order gives Citigroup further breathing room in a dispute between hedge funds suing over defaulted Argentine debt, known as holdout creditors, and the country.
Citigroup has said it faces regulatory and criminal sanctions by Argentina if it does not process interest payments on Argentina bonds issued under local law. Danielle Apsilos-Romero, a Citigroup spokeswoman, confirmed that the order will allow processing of the $85 million payment.
Argentina defaulted in July after refusing to honor court orders prohibiting it from paying holders of its restructured bonds without at the same time paying $1.33 billion plus interest to holdout creditors.
Griesa in July blocked Bank of New York Mellon Corp from processing a $539 million interest payment.
Monday's order marked the third time this year that Griesa had allowed Citigroup's branch in Argentina to process a payment to bondholders. Argentina's economy ministry issued a statement criticizing Griesa for taking a piecemeal approach to the question.
"With this latest postponement of a final decision, Judge Griesa continues harming the Republic (of Argentina) and the thousands of bondholders that are being held hostage by the vulture funds," the statement said, using the government's favorite term to describe the holdout hedge funds.
The holdouts get their name from the fact that rather than participating in Argentina's 2005 and 2010 restructurings, which offered around 30 cents on the dollar, they held out for a better deal and sued in U.S. courts.
The funds, including Elliott Management's NML Capital Ltd and Aurelius Capital Management, spurned restructurings in which about 92 percent of Argentina's defaulted debt was swapped for new obligations.
Daniel Pollack, the court-appointed mediator, told Reuters he thought Griesa was "giving the parties every opportunity to settle this long-running dispute."
"It is my hope that the parties will return to the bargaining table promptly after January 1," Pollack added. (Reporting by Nate Raymond and Daniel Bases in New York; additional reporting by Hugh Bronstein in Buenos Aires; Editing by Andrew Hay and Ken Wills)