Argentina yesterday announced a negotiating position with its private creditors that would involve at least a 75 per cent reduction in the value of defaulted sovereign debt, a plan immediately rejected by some bondholders as inadequate.

Mr Roberto Lavagna, Argentine Economy Minister, announced the proposal at the International Monetary Fund meetings in Dubai.

It follows the largest sovereign default in history, in December 2001, leaving private investors, including US institutional investors and large numbers of European retail investors, holding about $76 billion (€66 billion) in defaulted debt.

The full loss of value to investors will only be clear once negotiations have been completed with bondholders, but likely reductions in interest rates on the new bonds compared with the old will almost certainly increase the loss substantially above 75 per cent.

Mr Lavagna said the final outcome would depend on those negotiations, which will be led by a syndicate of banks to be announced next month. But he said the 75 per cent reduction on the face value of the bond was non-negotiable. The outline announced by the Argentinians set a floor for the primary fiscal surplus - the government surplus excluding interest payments - of 3 per cent in coming years, the same level as agreed for next year with the IMF.

Economists calculate that despite the IMF rolling over $12.5 billion of debt to Argentina for the next three years, the country will need a fiscal surplus of above 3 per cent in coming years just to service its IMF debt.

The Argentine proposal also envisages the IMF continuing to roll over its outstanding debt from Argentina until 2013.

Ms Lacey Gallagher, an economist at Credit Suisse First Boston, noted that the plan was unlikely to be acceptable to bondholders. "What they said is towards the weaker end of expectations," she said.

"It is not consistent with what the market is currently pricing for Argentine bonds." - (Financial Times Service)