Argentina's failure to repay bondholders who refused to take part in massive debt restructurings generated strong skepticism on Monday from a U.S. appeals court in New York, which questioned whether it was fair to let the country pay off some creditors but not others.

The outcome of the case, which stems from Argentina's roughly $100 billion default in 2002, could affect how easily countries might fend off angry creditors in bids to extricate themselves from sovereign debt crises.

Argentina is appealing a Feb. 23 ruling by a Manhattan federal judge that said some holdout bondholders owning $1.4 billion of defaulted debt deserved equal treatment with creditors that accepted harsh restructurings in 2005 and 2010 when it came to repayment. About 92 percent of Argentina's defaulted debt has been restructured.

In the February ruling, U.S. District Judge Thomas Griesa in Manhattan said the bond contracts required that holdouts, including NML Capital Ltd and Aurelius Capital Management funds, must be paid no later than the bondholders who took part in the restructuring.

A three-judge panel of the 2nd U.S. Circuit Court of Appeals questioned Argentina's argument that it was not in fact ranking the holdouts below other bondholders.

"Your obligation is to rank equally," Circuit Judge Reena Raggi told Jonathan Blackman, a lawyer for Argentina, before a packed courtroom during a nearly 1-1/2-hour hearing, more than triple the scheduled length. She said "it's hard to say" a decision not to pay some bondholders would accomplish that.

Blackman, a partner at law firm Cleary Gottlieb Steen & Hamilton, countered that the fact that one debt is not being paid does not mean holdout bondholders were being disfavored.

He called the contractual clause a "nuclear weapon" that would improperly allow holdout bondholders to throttle a sovereign debt restructuring.

Still, Circuit Judge Rosemary Pooler, referring to Argentina's financial troubles over the last decade, asked rhetorically: "Why would anyone who can read ever lend money to Argentina?"

The country remains embroiled in U.S. litigation with hedge funds and other creditors that have spurned restructurings and demanded full repayment. This litigation has been a major impediment to Argentina's return to global credit markets.

The 2nd Circuit typically takes several weeks or months to rule.

SOVEREIGN RESTRUCTURINGS

Theodore Olson, arguing at the hearing for NML and other bondholders that did not join the restructurings, said Argentina was simply trying to back out of its contractual obligations.

"Argentina has repudiated and subordinated its payment obligations to the plaintiffs in every way possible," said Olson, a partner at Gibson, Dunn & Crutcher and a U.S. solicitor general under President George W. Bush. "It subordinated them by making them worthless."

Blackman suggested that ruling against Argentina could spur more litigation by creditors, and threaten the ability of other financially-strapped countries -- he named Greece, Ireland, Italy and Spain as examples -- to undergo debt restructurings.

The U.S. Department of Justice has also said that Griesa's ruling could undermine the country's effort to encourage consensual, global efforts to address sovereign debt crises.

John Clopper, a lawyer for the Justice Department, told the 2nd Circuit panel that the Argentina case was not one where a country was favoring one creditor over another. "A change in legal rank is something other than selective payment," he said.

Griesa has awarded several billion dollars to holdout creditors, but they have been largely unable to collect because of U.S. sovereign immunity laws.

Last month, the U.S. Supreme Court rejected an appeal by NML and Kenneth Dart's EM Ltd of a 2nd Circuit ruling shielding $105 million of Argentina central bank deposits from claims, saying the bank and Argentina did not waive sovereign immunity.

A small breakthrough occurred last Thursday, when Griesa ordered the seizure of deposits and American depositary shares determined to have belonged to Argentina. That would allow the return of about $23 million to EM and NML, a small fraction of what the court has said they should receive.

The case is NML Capital Ltd et al v. Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.