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On the brink of default, Argentina says there's a 'big chance' its May 22 deadline will be extended

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Key Points
  • "We are of the view that there is a big chance that the deadline is extended so we can eventually make the amendments that are necessary in order to achieve a sustainable deal with our creditors," Guzman said during a webcast on Tuesday.
  • It has tentatively elevated hopes that the crisis-prone South American country will be able to avoid its ninth sovereign debt default — at least for now.
  • The country's economy, which was already grappling with a two-year recession, sky-high inflation rates and rising levels of poverty, has been hit hard by the coronavirus pandemic.
Argentinas Economy Minister Martin Guzman arrives for a press conference at Casa Rosada announcing measures during the outbreak of the new Coronavirus, COVID-19, in Buenos Aires, Argentina on March 17, 2020.
JUAN MABROMATA | AFP via Getty Images

Argentina's Economy Minister Martin Guzman has hinted that make-or-break talks with international creditors are likely to continue beyond the looming May 22 deadline.

It has tentatively elevated hopes that the crisis-prone South American country will be able to avoid its ninth sovereign debt default — at least for now.

"We are of the view that there is a big chance that the deadline is extended so we can eventually make the amendments that are necessary in order to achieve a sustainable deal with our creditors," Guzman said during a webcast on Tuesday.

Argentina had initially approached international creditors holding some $65 billion worth of bonds with an offer that included a three-year grace period and a significant cut to the country's interest payments.

Some bondholders were open to the offer, accepting that the country's debt had become unaffordable and that it should be given more time to pay, but many rejected the deal.

Guzman said bondholders have since submitted three counter proposals to restructure the debt. Both sides were still having "constructive dialogue," he added, but they needed to deepen the process of collaboration to reach a deal.

"The sooner this gets resolved, the better," Guzman continued. "The deal has to be successful for giving Argentina the conditions for being back on its feet and that's how the process will continue."

Separately, a grace period for a $500 million group of interest payments on three foreign bonds is also set to end on May 22.

What's going on?

Talks to restructure Argentina's debt come around five months into President Alberto Fernandez's administration.

The country's economy, which was already grappling with a two-year recession, sky-high inflation rates and rising levels of poverty, has been hit hard by the coronavirus pandemic.

To date, 8,809 people have contracted Covid-19 in Argentina, with 393 deaths nationwide, according to data compiled by Johns Hopkins University.

In comparison, neighboring Brazil has recorded the third-highest number of confirmed Covid-19 infections in the world, with over 271,000 cases and 17,983 fatalities.

Signal hanging with a message in Spanish that reads 'protect your mouth with a mask' in the empty Buenos Aires obelisk landscape during the government-ordered lockdown on May 01, 2020 in Buenos Aires, Argentina.
Ricardo Ceppi | Getty Images

Earlier this month, a group of leading economists including Nobel prize-winner Joseph Stiglitz urged bondholders to "act in good faith." They argued debt relief for Argentina would be "the only way to combat the pandemic and set the economy on a sustainable path."

It is in this context that talks to restructure Argentina's debt payments have received international attention, with less than 48 hours for both sides to stave off a devastating default.

A source familiar with the negotiations — who asked not to be named due to the sensitivity of the discussions — told CNBC that the talks had become "more private" in recent days.

They argued the South American country had done "everything possible" to present a fair and logical deal to creditors.

In fact, given that approximately 85% of the government's work to put an offer on the table came before the coronavirus epidemic, the source told CNBC that what the country had offered "might be a bit over the top" given its payment capacity is now less than it once was.

Why does it matter?

In 2001, Argentina defaulted on around $100 billion of debt.

It triggered the worst economic crisis in the country's history and resulted in millions of middle-class citizens falling into poverty — a consequence many in Argentina blame on the fiscal policies enforced by the International Monetary Fund at the time.

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"We have already lived through this situation in the past," Martin Insaurralde, Mayor of Lomas de Zamora, a province in the capital city of Buenos Aires, told CNBC via a translator.

"We have these creditors that live thousands of miles away and they don't see the human impact (and) the human harm that they cause in the pursuit of their profits. We hope this time it will be different because the context is different," he continued.

When asked whether he believed a deal with creditors was forthcoming, Insaurralde replied: "We are very confident that the creditors will do their part. All newspapers say: 'Well, creditors don't understand politics.' But they leant money not to a business but to a government — to a country."