(Bloomberg) -- A battle is shaping up between global bondholders and Sri Lankan authorities as the nation seeks to restructure its debt to gain access to more aid from the International Monetary Fund.

Overseas investors such as BlackRock Inc. and Pacific Investment Management Co. are demanding that domestic debt holders share billions of dollars of losses as the government prepares to outline its plans on Thursday. But authorities haven’t committed either way, with officials mindful that piling losses on local banks may endanger financial stability. 

The government will give more clarity by April, Treasury Secretary Mahinda Siriwardena said at a forum in Colombo Thursday, when asked if local debt will be restructured.

“I do expect some parts of the local debt will be included in the restructuring,” said Clifford Lau, Singapore-based portfolio manager at William Blair Investment Management, which owns the nation’s dollar and local bonds. “However, the calibration of the domestic debt restructuring perimeter is a very delicate matter due to repercussions on the financial sector.”

The South Asian nation will have to balance local interests against the demands of global investors as it restructures $84 billion of debt to haul the economy out of the worst slump in decades. A speedy resolution will help Sri Lanka to avoid the fate that has befallen Zambia, which hasn’t been able to tap the global bond market after talks with its creditors stalled

Sri Lanka’s local currency debt stood at around $38 billion in 2022, while its external borrowings totaled $41 billion, according to the IMF, which gave the nation a $3 billion bailout last week. 

IMF Review

The IMF’s four-year loan program is reviewed every six months. Funds will be disbursed based on Sri Lanka’s ability to meet targets that include wealth taxes and debt reductions.

Sri Lanka is seeking to strike a debt restructuring deal by the time the first review takes place, President Ranil Wickremesinghe, who is also the nation’s finance minister, said Thursday.

The nation’s dollar bonds have returned almost 19% this year to beat most of their emerging-market peers. Its notes due March 2030 have rebounded to about 36 cents on the dollar from a low of 22 cents in November amid optimism over their recovery value. 

Barclays Plc expects some local debt to be restructured, and raised its recovery estimates for the nation’s dollar bonds last week to mid-40 cents on the dollar.

“A small nominal haircut and credit enhancements like gross domestic product-warrants could improve recovery estimates closer to the mid-50s,” Avanti Save, a credit strategist at Barclays in Singapore, wrote in a note.

The IMF had outlined a scenario where Treasury bills can be switched to longer-term debt, while a select pool of local debt may be subject to maturity extension and a coupon cut.

A creditor group of the nation’s dollar bondholders, including BlackRock and Pimco, had written to the IMF expressing their willingness to engage in quick debt restructuring talks with the island nation.

“It’s important to deal with this fast,” said Simon Hinrichsen, portfolio manager at Sampension Administrationsselskab AS in Hellerup, Denmark. “Restructuring usually signal the trough in growth - balance sheets are repaired and investments start afterwards.”

--With assistance from Anusha Ondaatjie.

(Updates with comments from the treasury secretary and the president in the 3rd and 8th paragraphs.)

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