By Hugh Bronstein
BUENOS AIRES (Reuters) - Argentina asked a U.S. judge on Monday to issue a stay of his ruling against the country in its case against "holdout" creditors, as it sought to avoid a new default that would further punish an economy already slipping into recession.
The move is the latest twist in a 12-year-old battle with investors who refused to take part in bond restructurings after Argentina failed to pay about $100 billion of debt in 2002.
Without a stay on a ruling by U.S. District Judge Thomas Griesa, Argentina would be legally barred from making a June 30 coupon payment on its restructured bonds unless it pays $1.33 billion to holdouts seeking full payment of the debt they hold.
"We consider it essential that Judge Griesa issue a stay so that the republic of Argentina can continue paying the holders of restructured bonds," Economy Minister Axel Kicillof told reporters in Buenos Aires.
Lawyers for the ministry asked Griesa for the stay to "allow the Republic to engage in a dialogue with the plaintiffs in a reasonable time frame for these kinds of negotiations."
If the government does not make the June 30 payment, it has a 30-day grace period before falling into technical default.
A framework for talks between the holdouts and Argentina started taking shape when Griesa appointed New York financial trial lawyer Daniel Pollack as a special master to assist in the negotiations. Pollack told Reuters he plans on "moving as quickly as possible given the time constraints."
The government also announced on Monday that the economy contracted in the first quarter after shrinking in the last three months of last year. The shrinkage was expected and local financial asset prices rose on Monday thanks to President Cristina Fernandez's reversal of her policy of not negotiating with holdouts.
She has long portrayed them as "vultures" picking over the bones of the 2002 debt crisis, which thrust millions of middle-class Argentines into poverty.
The two-term leader has dialed back the rhetoric in her speeches lately, but her government splashed advertisements in leading U.S. newspapers over the weekend accusing the holdouts of pushing the country to the brink of financial catastrophe.
More than 90 percent of bondholders have accepted the restructurings, which left them with less than one-third of the original value of their bonds.
FINANCIAL MARKETS RALLY
Over-the-counter local bonds RPLATC closed up 5.5 percent on Monday. The Merval stock index MERV= rose 8.7 percent and the peso strengthened 4.62 percent to 11.90 per U.S. dollar in black market trade ARSB=. The official exchange rate ARS=RASL was nearly unchanged at 8.1325 to the dollar.
Restructured Argentine bonds, already higher on speculation a deal will be reached, added to gains after a flurry of headlines from Buenos Aires and New York.
The 2033 Discount Bonds ARGGLB33=RR traded up 9.99 points in price to bid 88.22, driving the yield down to 9.82 percent, according to Thomson Reuters data. The Argentine Par bonds maturing in 2038 ARGGLB38=RR rose 2.01 points in price to bid 48.33, pushing the yield down to 9.08 percent.
Argentina's international bonds have not traded at better levels since August 2011.
(Additional reporting by Alexandra Ulmer and Walter Bianchi in Buenos Aires and Daniel Bases and Joseph Ax in New York; Editing by Meredith Mazzilli, Kieran Murray, Chizu Nomiyama, Jeffrey Benkoe and Andre Grenon)