Argentina says bond payment must go through despite U.S. ruling

(Adds details of letter by holdout creditor to U.S. judge)

By Sarah Marsh

BUENOS AIRES, March 13 (Reuters) - Argentina on Friday demanded banks operating in the country process bond interest payments despite a U.S. court ruling that prohibited Citigroup Inc from distributing coupon payments on the country's local law bonds.

The government of leftist President Cristina Fernandez warned Citibank Argentina could lose its operating license if it refused. Wall Street analysts said the U.S. ruling dealt a blow to Argentina's hopes of issuing new debt, even under local law.

Citigroup is one of several international financial institutions caught up in Argentina's lengthy legal feud with bondholders who rejected the country's bond swaps after its 2002 default and who are pressing for full payment.

U.S. District Judge Thomas Griesa ruled on Thursday that letting Citigroup process the payments on so-called dollar-denominated exchange bonds would violate a requirement that Argentina treat bondholders equally.

Argentina said Griesa had no right to interfere with bonds contracted under Argentine law. His orders already caused the country to default on bonds under foreign law last year.

"It's a shameful abuse of jurisdiction," the economy ministry said in a statement.

A Citigroup spokesman said the bank would "pursue all legal measures available to comply both with (Griesa's) decision and Argentine legislation. Citi will appeal the court's decision."

Lawyers for holdout creditor Aurelius Capital Management wrote to Griesa on Friday, asking him to reject Citigroup's request to suspend his order while the bank appeals.

Facing stagnant growth and high debt servicing costs, the cash-strapped government had hoped to issue dollar-denominated local law bonds to non-U.S. investors this year.

Argentina tried in February to sell $2 billion of dollar-denominated bonds through Deutsche Bank AG and JPMorgan Chase & Co. The issuance was scrapped after Griesa ordered the banks hand over relevant documents.

Griesa's latest ruling makes a new bond offering even less likely, determining that local law bonds offered abroad amounted to foreign debt and were therefore subject to his ruling, finance experts said.

"Griesa doesn't want Argentina selling bonds to foreigners," said Siobhan Morden, emerging market debt strategist at Jefferies in New York. "So the difficult part is, how do you sell bonds without international intermediaries?"

Alejo Costa of Buenos Aires-based investment bank Puente said Argentina would struggle to raise significant amounts of dollar debt locally.

Battling to shore up foreign reserves, Argentina could pursue less conventional financing channels including another currency swap loan with China to avoid an eventual cash crunch.

(Additional reporting by Hugh Bronstein in Buenos Aires and Jonathan Stempel in New York; editing by Richard Chang, Diane Craft, Bernard Orr and Matthew Lewis)