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BUENOS AIRES/NEW YORK (Reuters) - Citigroup Inc (C.N) will not appeal a U.S. judge's ruling that it cannot process an Argentine sovereign debt payment if he helps the bank exit its custody business in the default-hit country as swiftly as possible, its lawyer said on Wednesday.
Citigroup's stance paves the way for a showdown with leftist President Cristina Fernandez's government, which is demanding the bank handle a March 31 payment or else risk sanctions, including the possible loss of its operating license.
Earlier on Wednesday, a senior source in Fernandez's government said she would not allow Citigroup to walk away from its custody business, in which it acts as custodian of some Argentine bonds and processes payment for the ultimate security holder.
But Denis McInerney, a lawyer for Citigroup, urged U.S. District Judge Thomas Griesa in New York to suspend his order blocking payments to enable the bank to fulfill its obligations in Argentina while it exited its custody business there.
"Citibank wants to be completely out of this business and have nothing to do with processing payments on these bonds at any point ever again," he said during the court hearing, according to a transcript.
He added he was "not certain" the bank could get out of it before a June 30 payment is due.
Citigroup has found itself at the center of a bitter court battle between Argentina and a group of New York-based hedge funds that were awarded full payment on their defaulted sovereign bonds by Griesa.
Griesa ruled Argentina must settle with the funds before it continue paying interest to the large majority of investors who accepted significant writedowns on the debt holdings after the country's record default on $100 billion in 2002.
His ruling prompted Argentina to default on some of its restructured debt last July.
Ranked one of the world's leading custodian banks, Citigroup on Wednesday portrayed itself as an innocent third party faced with the untenable choice of ignoring Griesa and being held in contempt of a federal U.S. court, or putting its license in jeopardy.
Its decision to exit its custodial business in Argentina may hamper the government's efforts to pay bondholders and return to global markets.
Fernandez denigrates the holdout creditors as "vultures" bent on pursuing astronomical profits. The funds say she is turning her back on legitimate debt obligations.
Citibank Argentina opened its first branch in 1914. It is the country's 12th largest bank by deposits with 22.82 billion pesos ($2.67 billion) as of December, about 2.6 percent of all deposits in the Argentine banking system, central bank data showed. The bank employs 2,800 staff and has 71 branches.
Argentina's capacity to block Citibank's plans may hinge on the small print of the bank's contract with the economy ministry confirming it as custodian of local law restructured bonds, an official at a state bank said.
Under Argentina's banking regulations, it would be the Central Bank of Argentina that suspends or cancels Citibank Argentina's operating license.
Fernandez' political opponents have long complained about the central bank's diminished independence during her leadership, and one banking industry source said such a decision would be a political one.
"That would be the perfect scenario for Fernandez to present herself as the victim," the official at a state bank said.
Fernandez has already shown herself willing to act tough. In August, Argentina stripped Bank of New York Mellon of its authorization to operate as an intermediary for payments on foreign law restructured bonds after it obeyed Griesa and refused to pass on payment to creditors.
Argentina set a Wednesday deadline for the bank to inform authorities whether or not it planned to process the upcoming coupon payment, worth about $3.7 million on its 2038 dollar-denominated Par bonds ARPARD=RASL held under Argentine law.
If it refuses to handle the payment, and the funds do not reach creditors, Argentina's default on its restructured debt held under foreign law will spread to the local law bonds. Griesa had previously allowed Citibank Argentina to make three one-time payments on local law paper.
Citigroup's decision to sell parts of its custody business or end some of its client relationships is without precedent in Argentina, some bankers said.
Belgium-based clearing house Euroclear, which distributes Argentine interest payments to bondholders, said last week it had opened an account in Argentina, as part of an expansion into new markets. However, it said it would not handle bond payments affected by Griesa's ruling.
Earlier on Wednesday, Argentina filed a motion in Griesa's court opposing claims by more than 500 "me-too" creditors seeking payment on debt worth $5.4 billion, owed since the country's 2002 default.
These creditors' claims, filed by March 3, are separate from the $1.33 billion plus accrued interest awarded to the hedge funds by Griesa. Argentina had insisted payment of that debt would unleash a torrent of claims it could not afford.
"As predicted by the Republic, the floodgates have now opened," Argentina said in a motion filed in the court.
Argentina said there was now $10 billion in judgments and claims before Griesa, making "compliance even more unattainable."
Additional reporting by Eliana Raszewski in Buenos Aires; Writing by Richard Lough; Editing by W Simon, Dan Grebler, Andrew Hay and Jonathan Oatis