(Adds Jeffrey Sachs comment)
By Cassandra Garrison
BUENOS AIRES, May 5 (Reuters) - Argentine bonds edged up on Tuesday, with the country locked in a $65 billion game of chicken with creditors as a deadline for bondholders to accept a tough debt restructuring proposal looms at the end of the week.
Bondholders have until Friday to respond to Argentina’s proposal to impose large reductions on coupons, a three-year payment hiatus and push back maturities into the next decade.
It is part of a broader sovereign debt restructuring with creditors, including the International Monetary Fund and Paris Club of country-to-country lenders, as Argentina struggles to keep up with payments.
If the government fails to gain enough support for its deal, it could risk a painful default, with a grace period to pay around $500 million of interest on three separate dollar bonds due on May 22.
The prospect of securing an agreement by the Friday deadline has darkened after a trio of major creditor groups rejected the offer, and Economy Minister Martin Guzman acknowledged that reaching a consensus had “proven difficult.”
“Argentine authorities are now gearing up for the economic aftermath with increasing foreign exchange controls to mitigate the shock,” Amherst Pierpont said in a client note.
“The hard default could eventually complicate IMF negotiations with lending into arrears requiring good faith efforts to negotiate with bondholders.”
It was not, however, out of the question, despite the government’s tough talk, that last-minute negotiations could take place before the May 22 due payment, analysts said.
“The strategy in the following two weeks could be to seek to improve the offer,” said Gustavo Ber, an economist at local firm Estudio Ber, who pegged May 22 as the real deadline.
“It is not though known if there will be modifications and whether they will be enough to avoid entering default.”
Argentina’s economy ministry responded to creditors’ criticism of its proposal on Tuesday, saying in a statement the government had always looked to maintain “a transparent, good faith and constructive dialogue with creditors.”
It added the government had rejected a counter-proposal from bondholders on April 11 because it was incompatible with its macroeconomic framework. Argentina urged creditors on Monday to come forward with specific “common-sense” proposals.
If creditors remain obtuse to Argentina’s economic outlook, worsened by the coronavirus pandemic, and refuse to accept the proposals, they could end up on the losing side as emerging markets buckle under financial distress, according to economist Jeffrey Sachs.
“The creditors would be foolish to turn the exchange down,” Sachs said.
“The government cannot pay and will not sacrifice its people to pay interest rates that are astronomical. Nor will it agree now on terms that will simply lead to a future default.”
Buenos Aires province is locked in parallel talks with its own creditors to revamp around $7 billion in foreign debt.
“The proposed exchange offer does not reflect (the province’s) reasonable payment capacity and, as such, does not present a path towards a consensual resolution,” the creditors group said in a statement on Tuesday, reiterating previous objections from bondholders.
“Regrettably, (the province) chose not to engage with the group and launched the current unilateral proposal,” the statement said. (Reporting by Cassandra Garrison and Walter Bianchi, additional reporting by Marc Jones and Rodrigo Campos; Editing by Tom Brown and David Gregorio)