By Nate Raymond
NEW YORK (Reuters) - Argentina urged a U.S. appeals court Friday to reconsider an order last month requiring it to pay $1.33 billion in favor of hedge funds that have refused to participate in two debt restructurings that sprang from Argentina's 2002 default.
In a court filing, Argentina asked the 2nd U.S. Circuit Court of Appeals in New York for a rehearing either by the three-judge panel that issued the August 23 decision or by a larger group of 14 judges on the court.
"The decision makes grave legal errors that magnify the error of the panel's previous unprecedented holdings," Argentina's lawyers wrote.
The petition for a so-called en banc hearing sets the stage for a final attempt by Argentina to reverse a ruling that has created concerns of a potential new debt crisis in South America's third-largest economy.
The case, which could ultimately find itself at the U.S. Supreme Court, stems from Argentina's $100 billion default on its sovereign debt in 2002.
In two restructurings in 2005 and 2010, creditors holding around 93 percent of Argentina's debt agreed to participate in debt swaps that gave them 25 cents to 29 cents on the dollar.
But bondholders led by the hedge funds NML Capital Ltd, which is a unit of Paul Singer's Elliott Management Corp, and Aurelius Capital Management went to court, seeking payment in full.
The case was filed in New York under the terms of the language in the bond documents.
After years of litigation, the holdout bondholders won a major coup in October 2012, when the 2nd Circuit upheld a ruling from earlier in the year by U.S. District Judge Thomas Griesa, who found that Argentina violated a clause in the bond documents requiring the equal treatment of creditors.
The court sent the case back to Griesa to determine how the payment mechanism would function and how injunctions he issued would apply to third parties and intermediary banks.
Griesa in November 2012 ordered Argentina to pay $1.33 billion into a court-controlled escrow account for the dissident bondholders. The appellate court last month affirmed that holding.
Argentina has refused to pay the holdouts in full. If it continues to refuse, U.S. courts could enforce injunctions blocking payment overseas to bondholders who participated in past restructurings, setting the stage for a possible new default.
Implementation of the 2nd Circuit's August ruling has been put on hold while the United State's highest court decides whether to hear the case. Argentina's next debt payment at the end of September is for $164 million, according to Friday's brief.
At a hearing Tuesday, Griesa said "the plaintiffs here are still faced with a Republic who will not pay what is required of the Republic."
He added: "Hopefully, when the 2nd Circuit decision becomes final, if the Supreme Court turns that down, that defiant attitude will change."
But in its brief Friday, Argentina's U.S. lawyers said the reaction by the country's officials wasn't defiance but "the reaction any state would have to such a prospect" about the possible impact on its debt being paid.
Argentina's Senate, at the urging of President Cristina Fernandez, voted Wednesday to indefinitely open a bond swap that would offer holdouts the same terms as a prior swap in 2010.
Argentina is meanwhile pursuing an appeal of the earlier 2nd Circuit ruling in October 2012 to the U.S. Supreme Court, whose next term starts in October.
In seeking rehearing at the 2nd Circuit, Argentina's lawyers argued that the three-judge panel had incorrectly interpreted the equal-treatment clause in the bond documents.
It also contended the decision contravened the Foreign Sovereign Immunities Act, which limits when foreign countries can be sued in U.S. courts.
The three-judge panel exceeded its powers, Argentina argued, by finding the limited remedies open to the holdouts under FSIA were inadequate and justified court orders to coerce it to giving holdouts relief intended to force the country to paying damages.
"Courts cannot use their remedial powers to override the intent of Congress," Argentina argued.
Hours before Argentina sought rehearing by the full 2nd Circuit, a group of creditors who participated in the debt swaps and hold more than $1.5 billion in exchange bonds made the same request.
The bondholders, which include Gramercy Financial Group LLC, warned that the injunction if upheld would likely trigger a default on $65 billion worth of exchange bonds, creating "devastating consequences" for the global economy and sovereign debt restructurings.
Hearings en banc by the full appeals court are rare. From 2001 to 2010, the 2nd Circuit granted such petitions just 0.03 percent of the time, according to a study by the Federal Bar Council.
The case is NML Capital Ltd et al v. Republic of Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.
(Reporting by Nate Raymond; Editing by Lisa Shumaker)