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IMF backs off plan to file with top U.S. court in Argentina case

By Anna Yukhananov

WASHINGTON (Reuters) - The International Monetary Fund no longer plans to ask the U.S. Supreme Court to review Argentina's case in its decade-old legal battle with holdout creditors due to a lack of support from the U.S. government, the IMF said on Tuesday.

IMF Managing Director Christine Lagarde had planned to recommend that the IMF's board approve a friend-of-court brief in support of the case by the end of this week, but decided not to. The brief would have been the first the IMF filed with the highest court in the United States.

The news is likely to sharply hit prices of Argentina's bonds, which had rallied on news of the IMF's planned brief.

The IMF, the Washington-based global lender, has said it was worried a ruling against Argentina would make it more difficult for other countries to restructure their debt and put financial calamity behind them.

The board discussed Lagarde's recommendation on Tuesday. But the United States, the IMF's largest and most influential member, no longer supported the Fund's planned filing to the Supreme Court, known as an amicus curiae brief.

The United States said it too was concerned a ruling in favor of holdouts could make sovereign debt restructurings less predictable and orderly, and had serious concerns about lower court decisions.

But the United States did not believe it was the right time to file a brief in support of the case, while litigation was still pending in lower courts, an official at the U.S. Treasury said.

"The Managing Director's recommendation was premised on U.S. support, as it would not be appropriate for the IMF to file this brief without that support," an IMF spokesman said.

"The Fund remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt restructuring process in general.

A Fund official said it would have been inappropriate to file a brief on behalf of Argentina in a U.S. court without the support of the U.S. government, as it could pitch the IMF into a dispute between two of its members and violate its neutrality as an international organization.

The official, speaking on condition of anonymity, also said the lack of U.S. support could undermine the effectiveness of the Fund's filing.

The U.S. government had filed prior briefs to lower courts agreeing with the IMF's sentiments. But the United States on Friday said it will not file a brief asking the Supreme Court to review the case.

The U.S. Justice Department almost never files friend-of-the-court briefs before the Supreme Court has decided to hear a case, unless the justices ask it to.

"The United States will continue to consider whether and when to participate in this litigation," the U.S. Treasury official said in an email.

"This includes a possible opportunity for the United States to express its views if the Supreme Court invites the United States to do so."

DEBT BATTLE

Over the last decade, holdout investors and Argentina have sparred in the U.S. courts over the South American country's $100 billion default in 2002. Holdouts declined to take part in two restructurings in 2005 and 2010 that drew participation from 93 percent of bondholders, who accepted returns as low as 25 cents on the dollar.

Investors including Aurelius Capital Management and NML Capital, a unit of billionaire hedge fund manager Paul Singer's Elliott Management, have refused a deal and are suing Argentina to recover the full value of their assets.

Argentina is asking the Supreme Court to void an October 2012 ruling by the 2nd U.S. Circuit Court of Appeals in New York, which found it had violated a clause in its bond documents requiring it to treat all creditors equally.

The appeals court has not yet ruled on whether to require Argentina to pay the holdouts. A ruling in their favor would put Argentina on the hook for more than $1.3 billion in payments and risk another default.

The Supreme Court is on its summer break and won't decide whether to hear the Argentina case until the fall.

The Supreme Court decides to hear fewer than 1 percent of the thousands of petitions that are filed each year. But some investors believed the IMF's participation could have increased the chances the case is reviewed.

In an April paper, the IMF said a ruling against Argentina could "risk undermining the sovereign debt restructuring process" by making it more difficult for governments to get agreement from all creditors to accept new debt, which usually pays lower interest rates.

But the 2nd Circuit rejected the IMF's arguments, saying most new bonds include collective action clauses that eliminate the threat of holdout litigation by requiring that all creditors accept a restructuring if it is approved by a supermajority.

The IMF is a lender of last resort to governments in financial distress, and has an incentive to ensure countries can get their finances in better shape after a crisis. It helped Greece restructure billions of dollars in privately held debts as the euro zone country sought to wade out from its debt pile.

A person familiar with the IMF's position said last week the IMF's filing would not have been on behalf of Argentina, but rather had to do with the stability of the financial system.

The Fund is no great friend of Latin America's third-biggest economy, and the two have clashed in recent years over the accuracy of Argentina's economic data. The IMF's board in February formally reprimanded Argentina for its lack of progress in improving inflation and GDP data. The country could face board sanctions in November, barring it from voting on IMF policies or accessing financing.

Argentina has cut all financial ties with the IMF and relations between them have steadily deteriorated since Argentina's 2001-2002 debt crisis, which the center-left government and many ordinary Argentines blame on IMF policies.

(Editing by Eric Walsh)

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