UPDATE 5-U.S. court lifts freeze on Argentina deposits

* $100 million deposits had been frozen

* Plaintiff NML may appeal, calls decision "wrong"

* Argentina seeks to clear path for new bond sales (Adds comments from central bank chief, economy minister)

By Jonathan Stempel

NEW YORK, July 5 (Reuters) - Argentina won the lifting of a freeze on $100 million of central bank deposits that was imposed to satisfy claims by two U.S. investment funds arising from the country's massive 2002 debt default.

In lifting the freeze, a federal appeals court in New York said on Tuesday that U.S. law shields property of a foreign central bank used for traditional central banking activities, regardless of whether the bank is "independent" from its parent state.

"Argentina's record in global bond markets has given new meaning to the concept of caveat emptor," Judge Jose Cabranes wrote for a panel of the 2nd U.S. Circuit Court of Appeals, referring to the Latin expression for "let the buyer beware."

Nevertheless, he said the freeze had to be lifted because of the "severe restrictions" under a U.S. law, the Foreign Sovereign Immunities Act of 1976, on the ability of Argentina's creditors to freeze or seize assets. He agreed that the central bank in this case did not waive its immunity.

Argentine Central Bank President Mercedes Marco del Pont called Tuesday's ruling "good news", telling reporters in Buenos Aires it addressed the fundamental question of protecting Argentina's deposits. She said she expected some bondholders to appeal the ruling.

The decision reverses an April 2010 ruling by U.S. District Judge Thomas Griesa, who oversees U.S. litigation over Argentina's $100 billion default.

Griesa concluded that Argentina and its central bank should be treated the same way, as "alter egos," in determining whether to seize assets.

That ruling was a victory for Argentine bondholders EM Ltd, controlled by the investor Kenneth Dart, and NML Capital Ltd, an affiliate of the investment firm Elliott Management Corp.

The disputed deposits have been frozen since 2006 and held at the U.S. Federal Reserve Bank in New York.

In a court filing supporting Argentina's position, the New York Fed said Griesa's ruling caused "unnecessary uncertainty in the law" as to foreign central bank immunity, and could prompt banks to withdraw dollar reserves held in New York.

The case was returned to Griesa's court for further proceedings.

NML said it may appeal, calling Tuesday's decision and its conferring of immunity on the central bank "wrong." It said it will continue trying to hold Argentina accountable for billions of dollars of U.S. court judgments.

An EM spokesman declined to comment. New York Fed spokesman Jeffrey Smith declined to comment.

IMMUNITY NOT WAIVED

Argentina has faced nine years of U.S. litigation over its default, hampering efforts by Latin America's third-largest economy to eventually return to global capital markets. [ID:nN11149335]

The center-left government has said bondholders who did not take part in large 2005 and 2010 debt swaps do not deserve full recovery because it is unfair to bondholders who accepted less.

These holdout investors have about $2.5 billion in Argentine paper, Economy Minister Amado Boudou told reporters.

Enrique Alvarez, head of Latin America research at IDEAglobal in New York, said Tuesday's decision may let Argentina free up some reserves, but is merely one step toward helping the country return to credit markets.

"You'd have to assume that the hedge funds underlying this long, drawn-out path in the courts are going to give up and are not going to press forward," he said. "I don't think you can make that assumption."

Much of Tuesday's decision turned on the FSIA's meaning.

One provision allows funds to be tied up when the use of those funds constitutes commercial activity.

But another shields a foreign central bank's funds "held for its own account" -- for traditional central banking activities -- unless the bank or a government waives immunity.

In his decision, Cabranes said "the history of the FSIA and of the independence of central banks suggests that Congress understood the property of a foreign central bank to be deserving of immunity regardless of the bank's independence."

Argentina suffered a setback last Thursday when New York's top state court, the Court of Appeals, said the country should keep paying interest on some defaulted bonds even after they matured. Some carried interest rates as high as 101 percent. [ID:nN1E75T0PY]

The case is NML Capital v. Banco Central de la Republica Argentina et al, 2nd U.S. Circuit Court of Appeals, No. 10-1487. (Reporting by Jonathan Stempel; Additional reporting by Daniel Bases, Walter Brandimarte and Kristina Cooke in New York, Helen Popper and Hugh Bronstein in Buenos Aires; Editing by Dave Zimmerman, Matthew Lewis and Tim Dobbyn)