Argentina's plan for making payments on its sovereign bonds via a local bank aims to protect the vast majority of creditors who participated in two debt restructurings, Cabinet chief Jorge Capitanich said on Wednesday.

The government is sending a bill to Congress replacing its New York intermediary bank with state-run Banco Nacion, the latest move in a years-old legal chess game between Argentina and holders of defaulted bonds who have sued for full repayment.

The deadlock has kept the economically ailing country from being able to issue international bonds at a time of falling central bank reserves.

Argentina slid into default on its restructured bonds last month after a New York court blocked an interest payment of $539 million. The payment did not go through to investors because U.S. District Judge Thomas Griesa says restructured bonds cannot be paid unless the holdouts get paid at the same time.

The $539 million remains with intermediary Bank of New York Mellon. Argentina says Griesa overstepped his bounds by blocking the coupon payment, and is moving to ensure future payments go through local banks.

On Tuesday President Cristina Fernandez said she would send a bill to Congress replacing Bank of New York Mellon with state-run Banco Nacion as intermediary. She also offered to swap bonds governed by U.S. law for debt under local jurisdiction.

"The point is to protect the 92.4 percent of bond holders who participated in the exchanges," Capitanich said.

Economy Minister Axel Kicillof was expected to hold a press conference later on Wednesday. The bond market meanwhile reacted negatively to the proposed change in jurisdiction, which Judge Griesa may see as an attempted evasion of his decisions.

Argentina's portion of the JP Morgan Emerging Markets Bond Index Plus widened by 22 basis points to 786 over U.S. treasuries, marking an increase in risk perception, while the index as a whole tightened by one basis point to 296.

The case goes back to Argentina's 2002 default on about $100 billion in sovereign bonds. The vast majority of holders participated in restructurings in 2005 and 2010, which offered less than 30 cents on the dollar.

A group of hedge funds led by Elliott Management Corp and Aurelius Capital Ltd. opted to sue in the U.S. federal courts, which govern the original bond contracts, for 100 cents on the dollar.

Fernandez calls the funds "vultures" who bought Argentine bonds at steep discounts and are out to wreck the country's finances in their pursuit of huge profits

Capitanich said the proposed change in jurisdiction would not have been necessary if thehedge funds were willing to negotiate a settlement. Both sides in the case accuse the other of not bargaining in good faith.

"They have created conditions of anarchy and the destruction of the rule of law, all so they tenaciously attack countries that do not accept the conditions that they impose," the cabinet chief said.