Bondholders add twist to Argentina debt spat A group of funds caught in the middle of Argentina's latest debt saga has asked New York state's highest court to define the meaning of a pivotal clause in a high-profile legal dispute that has sparked fears of a fresh sovereign default. The request to spell out the meaning of the pari passu - or equal step - clause, was submitted late on Thursday to the Second Circuit Court of Appeals by so-called "exchange bondholders" (EBG), a group of holders of debt issued in 2005 and 2010 when Argentina restructured its defaulted bonds. The group includes Gramercy and hedge fund Brevan Howard. The submission came on the eve of a Friday deadline for Buenos Aires to submit its arguments to the appeals court in New York. Argentina and Elliot Associates - which bought the country's debt after the crash - are embroiled in a legal tug-of-war that has not only raised worries of another default, but also concerns that New York's hallowed place at the heart of the world financial system could be at risk, and questions whether sovereign restructurings could prove harder to pull off in future. New York Judge Thomas Griesa sent shockwaves through markets when he ruled in October that the pari passu clause in the nearly $100bn of bonds on which Argentina defaulted in 2001 meant that defaulted creditors who rejected the restructurings had the right to be repaid when Argentina paid the EBG. That left Argentina staring at the prospect of paying everyone, including the funds such as Elliot that it blasts as "vultures," or no one, and tumbling into technical default despite being willing and able to continue servicing its restructured debt. On November 21, Judge Griesa ordered Argentina to pay $1.33bn into escrow for the so-called "holdouts," led by Elliott, though the Second Circuit court froze that order pending its review of the judge's clarification of two key issues: how the payment mechanism would work, and its impact on third parties. Judge Griesa had given his order teeth by requiring parties handling payments to the EBG, including the Bank of New York Mellon, not to help Argentina circumvent the ruling by diverting payments. The Second Circuit court has scheduled a hearing on February 27 after all sides have had a chance to air their arguments in writing. "At the heart of the instant appeal is the issue of how to interpret under New York contract law a pari passu clause in an unsecured debt instrument - in this case, an international bond indenture issued by a sovereign debtor," the EBG said in its filing. "Now that the district court has decided how payments should be made pursuant to the pari passu clause - an interpretation that has enormous consequences for New York's preeminent financial services industry - the state's highest court should be given an opportunity to ensure that this court's review of the injunction is undertaken "with a correct understanding of the controlling principles of New York law,"" it added, citing a Second Circuit ruling from this year. Elliott and other holdouts reject fears that future sovereign restructurings could be affected, but the US Treasury and State Departments said earlier this month that as things stood, the ruling "may adversely affect future voluntary sovereign debt restructurings, the stability of international financial markets and the repayment of loans extended by international financial institutions" and could be problematic under the Foreign Sovereign Immunities Act. Other interested parties have joined the case including Puente, a leading Argentine financial institution and brokerage. Federico Tomasevich, Puente's president, argued that Judge Griesa's ruling is "very extreme and unjust for our country." He told the Financial Times: "I don't think they have taken account of the damage this would have . . . on the real economy in Argentina." The Elliott-led creditors, meanwhile, have served subpoenas on Argentina's lawyers, Cleary Gottlieb Steen & Hamilton and exchange bondholders. They suspect Argentina - which they blast as an "intrepid judgment-dodger," of attempting to "shirk" the court ruling, and want to see if the EBG "are colluding with Argentina to frustrate enforcement." They said in a filing: "At least one holder of Exchange Bonds has publicly professed a willingness to accept payment in contravention of the injunction. Constellation Capital, which has significant Exchange Bond holdings (about $500m, by one account) has affirmed that, if Argentina can figure out a way to offer payment, it will gladly accept it. The EBG countered that the subpoenas seemed a bid to "harass" restructured debt holders. Argentina, which has floated, in vague terms, the notion of offering a third swap of defaulted for new debt as a fairer solution, is expected to stress that Judge Griesa's ruling prevents the EBG's trustee, BNY Mellon, from delivering cash that belongs to the bondholders. The government of Cristina Fernández, who has often vowed never to pay "vultures" who bought defaulted bonds at a discount, won a breather when Judge Griesa's order was frozen. "They got the impression they could win this," said Eugenio Bruno, a former holdout lawyer.