BUENOS AIRES (Reuters) – Argentina could cede ground to creditors on key legal terms as it looks to strike a deal to restructure around $65 billion in foreign debt, but the government will not increase overall cash flow in the payout, two sources told Reuters.

The South American country is facing a standoff with bondholders after creditor groups joined forces to reject the government’s proposal this week and put forward one of their own. The government has repeatedly said it cannot offer more.

However, two sources close to the talks said the government may be willing to bend on some of the demands in the joint creditor counterproposal as long as it did not involve increasing the cash flow in any final deal.

Argentina’s Economy Ministry declined to comment.

Creditors’ legal demands include that amendments be made to the 2016 indenture for new debt issued in exchange for ‘Macri’ bonds, to prevent the government from using ‘Pac-Man’ style measures to make future changes to any agreement.

“Argentina might be willing to identify which are the pain points around legal clauses, which is creating tension and noise within the investors’ community,” one source close to the talks said, declining to be named as the negotiations are private.

Talks to identify where concessions could potentially be made were taking place, the person added, and there may be room to “shift and twist” the existing Argentinian proposal to increase the net present value (NPV) without putting in more money.

“So I think that there could be flexibility but not on the real cash flow.”

A second source, a person close to the talks and familiar with government thinking, said in economic terms the current government offer was final, though there may be some leeway on legal clauses.

“In legal terms, Argentina could make modifications if a consensus emerges that the existing model clauses are somehow flawed,” the person said. “There will be no changes to NPV, unless the creditors realize that after the restructuring Argentina merits a discount rate of less than 10%.”

Despite digging in heels, analysts say a gap of about 3 cents on the dollar between the sides at the negotiating table should be bridged in last-ditch talks ahead of a current Aug. 4 deadline for a deal to avoid a messy legal standoff.

That has helped push up Argentine bond prices, which rose an average 1.8% on Wednesday.

Argentina has been in default since May, the country’s ninth, and is headed for 10-12% economic contraction this year due to the impact of COVID-19, deepening a recession since 2018.

Siobhan Morden at Amherst Pierpont said a compromise solution would be a win-win for Argentina that would give it substantial cash flow relief and allow focus to turn to domestic debt markets and negotiations with the IMF.

“It’s almost incomprehensible for Argentina to choose another alternative,” she wrote in a note.

Reporting by Adam Jourdan and Hugh Bronstein; Additional reporting by Rodrigo Campos; Editing by Tom Brown

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