By Hugh Bronstein and Rodrigo Campos
BUENOS AIRES/NEW YORK (Reuters) – Argentina received the IMF’s backing as it hit crunch time in debt restructuring talks on Monday, ahead of a deadline that may be postponed as investors try to squeeze more money out of an economy that was shrinking even before the coronavirus pandemic.
The government has set a Tuesday deadline for a deal to revamp about $65 billion in bonds rendered unsustainable by a long recession and currency plunge after a 2016-2017 borrowing binge by the previous administration.
The International Monetary Fund said in a statement that the government’s most recent bond revamp proposal would set the country on a sustainable debt management path and Argentina had little room to improve its offer.
“Argentine authorities’ revised debt restructuring proposal would be consistent with restoring debt sustainability with high probability,” the IMF statement said.
“IMF staff’s assessment further suggests that there is only limited scope to increase payments to private creditors and still meet the debt and debt service thresholds,” it said..
Over the counter Argentina bonds were slightly stronger on Monday following a 3.5% rise on Friday after the government and key bondholders exchanged new proposals. Creditors are asking for a deal that would provide more than 50 cents on the dollar and the government was offering about 45.
“The June 2 deadline for investors to respond to the government’s debt restructuring proposal presented on Thursday will likely be extended for another 10 days as the parties continue to make progress at the negotiating table,” Goldman Sachs (NYSE:) said in a note. The previous talks deadline was May 22, before it was changed by the government to June 2.
Economists speculated that the government can negotiate the creditors down to 50 cents on the dollar, the rest of the gap in bargaining positions could be breached by an offer of GDP warrants that would tie performance of new bonds issued in the restructuring to the future performance of the economy.
“There are some bondholders who want this kind of instrument, so it would help. But additionally, the government needs to offer more cash in the first years,” said Gabriel Zelpo, director of Buenos Aires economic consultancy Seido.
The government’s current proposal includes a two-year suspension of debt payments, which creditors would like to see shortened.
‘FAILURE TO PAY’
Holders of default insurance for Argentine bonds moved closer to collecting payouts on Monday when the Americas Credit Determinations Committee said a ‘failure to pay’ event occurred when the government missed an interest payment of about $500 million on May 22, after the expiry of a 30-day grace period.
The bonds in the current restructuring talks include a collective action clause (), which means the government needs to meet a threshold of 75% to 85% investor support – depending on the individual bonds in question – to move ahead with comprehensive restructuring.
None of the three creditor groups currently in talks hold enough to trigger the CACs, but together they do have the ability to block a deal they collectively reject.
Failure to reach a comprehensive deal after Argentina’s 2001 default led to a crisis that tossed millions of middle class Argentines into poverty and years of haggling with bondholders in U.S. courts, two consequences the government wants to avoid this time as it grapples with economic fallout from the pandemic.
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