NEW YORK, USA — A federal judge in Manhattan on Thursday said Argentina’s plans to evade his orders by failing to make required payments to US bondholders is illegal and cannot be carried out, but he stopped short of finding the South American nation in contempt of court.

US District Judge Thomas Griesa called Argentina’s actions toward US bondholders “lawless.” However, he rejected requests by lawyers for US hedge funds to make a contempt finding, saying he wanted everyone to concentrate on an eventual settlement.

“That is the path that should be taken,” Griesa said. “In my judgment, it does not add anything to the scales of settlement to make a finding of contempt.”

At an August 8 hearing, Griesa had threatened Argentina with contempt, saying the nation’s leaders were making “false and misleading” statements as they ignored obligations to pay the hedge funds.

Since then, Argentina’s public statements have grown more defiant. President Cristina Fernandez this week announced plans to make interest payments to other bondholders through her nation’s central bank rather than US banks that are subject to Griesa’s orders.

“It is illegal, and the court directs that it cannot be carried out,” Griesa said.

In a statement late Thursday, Fernandez’s office accused the judge of being contemptuous of Argentina’s sovereignty in his attack on the president’s plan to have her country’s lawmakers adopt legislation setting up the alternate repayment system. Griesa is trying to “impose conditions on the Congress, the highest legislative body of the nation.”

Fernandez has repeatedly decried the judge’s ruling that Argentina must repay US hedge funds that hold some of the Argentine bonds that were defaulted on after the country’ 2001 economic collapse.

The funds led by New York billionaire Paul Singer’s NML Capital Ltd. bought the bonds on the cheap after the default and are now demanding payment. Argentina’s leaders call the funds “vultures” because they refused to participate in swaps in 2005 and 2010 in which over 90 per cent of Argentina’s bondholders agreed to accept lesser-valued bonds.

“Far from delivering justice and bringing equal conditions among the parties, the judge only looks to favor the vulture funds,” Argentina’s statement said.

Argentina attorney Jonathan Blackman has repeatedly told the judge that the country is left with few options because any deal it reaches with US bondholders owed about US$1.5 billion would obligate it to pay over US$20 billion to other bondholders.

In a letter to the judge Wednesday, attorney Robert A. Cohen on behalf of the US bondholders said Argentina’s new proposal would offer his clients the same “stingy terms” that the hedge funds had declined twice before and force them to submit to Argentina’s “puppet bank” or “Argentina’s patsies” for payments.

At Thursday’s hearing, Cohen said a finding of contempt would send a stern message to top Argentine officials as well as to any financial institutions that might want to help Argentina avoid its obligations to US bondholders.

Attorney Carmine Boccuzzi, representing Argentina, said a contempt finding would not aid efforts to negotiate a resolution with help from a court-appointed special master and would lead to harsher rhetoric. He also said it was premature, since Argentina had not yet changed rules for how bondholders would be paid.

The judge may have passed on a contempt finding in part to send the message that he doesn’t do everything the funds request as Argentina has alleged, said Daniel Kerner, Latin America director at the Eurasia Group in Washington.

But if Argentina goes through with a plan to replace foreign bonds with new local issues to side-step Griesa, the judge is likely to find the nation in contempt, he said.

“What would the implications be? That’s not clear. Everything in this case is without precedent,” Kerner said.

Griesa said Argentina’s refusal to pay US bondholders is like a man showing up at a closing with only US$80,000 to buy a US$100,000 property and insisting “US$80,000 is a lot of money and my family is ready to move in.”

The judge added: “He would be laughed out of the neighbourhood.”