"That is the path that should be taken," Griesa said. "In my judgment, it does not add anything to the scales of settlement to make a finding of contempt."
At an Aug. 8 hearing, Griesa had threatened Argentina with contempt, saying the nation's leaders were making "false and misleading" statements as they ignored obligations to pay the hedge funds.
Since then, Argentina's public statements have grown more defiant. President Cristina Fernandez this week announced plans to make interest payments to some bondholders through its own central bank rather than U.S. banks that are subject to Griesa's orders.
"It is illegal, and the court directs that it cannot be carried out," Griesa said of the plan.
The U.S. funds led by New York billionaire Paul Singer's NML Capital Ltd. bought the bonds on the cheap after Argentina's 2001 default on more than $100 billion but are now demanding payment in full. Argentina's leaders have labeled the funds "vultures" because they refused to participate in swaps in 2005 and 2010 in which over 90 percent of Argentina's bondholders agreed to accept lesser-valued bonds.
Argentina attorney Jonathan Blackman has repeatedly told the judge that the country is left with few options because any deal it reaches with U.S. bondholders owed about $1.5 billion would obligate it to pay over $20 billion to other bondholders.
In a letter to the judge Wednesday, attorney Robert A. Cohen on behalf of the U.S. bondholders said Argentina's new proposal would offer his clients the same "stingy terms" that the hedge funds had declined twice before and force them to submit to Argentina's "puppet bank" or "Argentina's patsies" for payments.
At Thursday's hearing, Cohen said a finding of contempt would send a stern message to top Argentine officials as well as to any financial institutions that might want to help Argentina avoid its obligations to U.S. bondholders.
Attorney Carmine Boccuzzi, representing Argentina, said a contempt finding would not aid efforts to negotiate a resolution with help from a court-appointed special master and would lead to harsher rhetoric. He also said it was premature, since Argentina had not yet changed rules for how bondholders would be paid.
Griesa said Argentina's refusal to pay U.S. bondholders was like a man showing up at a closing with only $80,000 to buy a $100,000 property and insisting "$80,000 is a lot of money and my family is ready to move in."
The judge added: "He would be laughed out of the neighborhood."