President Cristina Fernandez's administration on Wednesday explained its proposal to pay bondholders under Argentine law and sidestep a U.S. court ruling prohibiting Buenos Aires from servicing that debt until it settles with a small group of holdout hedge funds.

The proposal, which the president unveiled Tuesday, opens the door for these so-called "exchange bondholders," who accepted steep haircuts in two debt swaps after the country's massive 2001 default, to collect on the debt payments either via state-owned Banco de la Nacion Argentina or another alternate avenue of their choice.

The plan does not involve a new debt restructuring, but rather a change in the payment jurisdiction to ensure the South American country "can continue paying and the (exchange) bondholders can continue collecting," Economy Minister Axel Kicillof told a press conference here Wednesday.

Argentina is seeking a way to comply with its obligations to the holders of restructured debt - issued under U.S. law - after a judge in New York blocked its most recent payment to those creditors.

U.S. District Court Judge Thomas Griesa ruled in favor of several hedge funds, led by Elliott Management Corp.'s NML Capital Ltd unit and Aurelius Capital Management, that sued Buenos Aires for full payment on bonds they bought at large discounts in 2002.

As part of his ruling, he barred Bank of New York Mellon, the trustee for holders of restructured Argentine debt, from disbursing the $539 million Buenos Aires deposited in June.

Argentina's appeal of the decision reached the U.S. Supreme Court in June, but the justices declined to hear the challenge.

"They (the exchange bondholders) also can offer a way out, a solution for collecting; this bill is not compulsory," Kicillof said of the administration's plan.

The bill has already been introduced to Congress, where Fernandez supporters are in the majority, and her administration expects it will be passed before its next payment is due to the exchange bondholders on Sept. 30.

"Given the scope of the difficulties Judge Griesa and the U.S. judicial system posed as far as the collection, not the disbursement, of the debt payments, it's reasonable that the (Argentine) Congress should have this solution that we're proposing," Kicillof said.

The bill proposes that two accounts be opened: one to pay the vast majority of bondholders that accepted debt swaps in 2005 and 2010 and, in a new development, a second to pay the 7.6 percent of holdout creditors who did not accept the writedowns, including the hedge funds that won the judgment in Griesa's court.

The payments will be made in the currency in which the bonds are denominated.

In the press conference, Kicillof again railed against Griesa, who in 2012 ordered Buenos Aires to pay the hedge-fund litigants more than $1.3 billion.

The ruling, Kicillof said, is "financial and political madness" that rewards 1 percent of bondholders in their strategy of "harassing" Argentina.

Fernandez's administration says that full payment to the hedge funds would lead other holdout bondholders to demand the same, creating a potential liability of some $15 billion, equivalent to half of Argentina's foreign-exchange reserves.

Kicillof urged Paul Singer, founder and CEO of Elliott Management Corp. and leader of the group of hedge funds demanding 100 cents on the dollar for Argentine bonds bought in the wake of Buenos Aires' record-setting default, to embrace the new plan.

He said that is unlikely though because he would have to settle for a 300 percent profit on his investment, compared with the 1,600 percent he is seeking to make thanks to Griesa's ruling.

Argentina defaulted on roughly $100 billion in debt in December 2001 - the largest sovereign default in world history - amid a financial meltdown and economic depression.

More than 92 percent of Argentina's creditors accepted steep haircuts in the 2005 and 2010 debt restructurings.

The origins of the debt problem go back to Argentina's 1976-1983 military regime, which presided over a 465-percent expansion in public indebtedness. EFE