LONDON/BUENOS AIRES (Reuters) – Argentina, in default since last month, is tantalizingly close to pulling off a $65 billion debt restructuring deal with creditors but still faces a complex set of hurdles to avoid falling into what one bondholder called debtor “zombie land.”

The South American country’s government is reworking a proposal to holders of its foreign debt as the two sides have inched closer to an agreement to revamp the debt. Creditors said they expect to have the new offer in coming days.

Striking a deal is key for the major grains producer to avoid years of legal battles and being locked out of global capital markets, which happened after a major default in 2001. Argentina defaulted for a ninth time in May.

“Unless there is an agreement in principle, Argentina would be walking into zombie land,” one bondholder who requested anonymity told Reuters, saying the country needed to improve on its offer to win over enough creditors for a comprehensive deal.

Argentina’s government has pushed a moving deadline for talks to June 12 and said it is looking to sweeten its offer, despite having only a “slim margin” to make any changes. In late May it unveiled an already improved proposal. (here)

Major creditor groups have been lowering their demands too (here), cutting the gap between the two sides and raising hopes of a deal. Still, both sides say there is much work left to do.

Bondholders say Argentina can pay more than is currently on the table. Analysts say the latest government offer is worth between 40-45 cents on the dollar, while a joint proposal from two of the three major creditor groups is north of 50 cents.

“We remain of the view that a deal is likely to be achieved over the next several weeks,” Goldman Sachs said in a note on Tuesday. It cautioned that the risk of no deal remained, however, saying the government was unlikely to significantly improve its terms.

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The International Monetary Fund, a major backer of Argentina, on Monday supported the government’s offer as being sustainable and said there was only limited room to improve it.

Argentina is set for a third straight year of recession with forecasts of an economic contraction around 6-7%, while emergency spending on the COVID-19 pandemic response is sapping government coffers and pumping up the country’s deficit.

Citi said in a note that Argentina’s government would likely use the IMF’s backing as “an argument to justify improving its offer less than what creditors seem to be asking for.”

Nonetheless, Argentine bonds have climbed steadily on growing expectations of a deal, rising over 20% on average in May.

“The mood music has changed considerably from both sides recently,” said one fund manager who has in recent weeks added significant amounts of exposure to Argentine bonds and is now overweight on the credit.

The fund manager, who asked not to be named, said the government was keen for a deal, especially given the impact of the coronavirus. President Alberto Fernandez is also seen as something of a moderating force in the talks.

“We’re getting close and think there’s quite a lot of potential upside, particularly as money flows back into emerging markets and Argentina will benefit as it’s a high yield, liquid credit,” he said.

“We think a deal will be done in the next week and a half. It seems that everyone wants to move on from this.”

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