* Informal $5 billion YPF offer sets negotiating floor
* Better offer would include more Vaca Muerta, not cash
* Argentina has little cash-raising potential
* YPF remains source of tension among Repsol shareholders
By Tracy Rucinski and Hilary Burke
MADRID/BUENOS AIRES, June 28 Argentina's $5 billion informal compensation offer for seizing Repsol's stake in energy firm YPF sets a floor for talks but the cash-strapped country may struggle to come up with a better offer.
Spanish oil major Repsol rejected on Wednesday an unofficial non-cash settlement for its 51 percent of YPF, expropriated by Argentina in 2012, but welcomed the government's willingness to start negotiations on a solution.
The offer was far below the $10.5 billion in cash or liquid assets Repsol is demanding in international arbitration and consisted mostly of a small stake in Argentina's Vaca Muerta shale field.
"It is likely that had the offer been in cash and liquid assets Repsol would have accepted the deal," Barclay's said.
But can Argentina pay cash?
The country has been effectively frozen out of global debt markets since it staged the world's biggest sovereign default in early 2002, at the height of a devastating economic crisis.
"Holdout" creditors who rejected its debt restructuring offers in 2005 and 2010 continue to sue for full repayment on their defaulted bonds, and it is not clear that Argentina could issue new debt without those creditors blocking the flows.
The central bank's international reserves have dropped roughly 18 percent in the last year to about $38 billion, as a scarcity of dollars on the tightly controlled foreign exchange market along with a decline in the trade surplus have eaten into its capacity to accumulate funds to offset debt payments.
Argentina has also failed to pay several compensation awards granted by a World Bank arbitration tribunal to U.S. companies - leading to the loss of some trading privileges with the United States.
Repsol has brought a complaint before the same World Bank body, the International Centre for Settlement of Investment Disputes.
BACK STAGE TURMOIL
Much is at stake for Argentina. President Cristina Fernandez needs foreign funds to develop the valuable Vaca Muerta shale field, with drilling virtually halted since the YPF seizure, and reduce reliance on expensive foreign energy.
But international investors are reluctant to put money into Vaca Muerta, put off by rules that limit private firms' control over their investments and Repsol's lawsuits against any company that tries to develop the field.
The YPF offer this week valued Vaca Muerta's 3 million acres at $43,000 each, giving it a first-time government valuation of an estimated $129 billion, an amount both Repsol and analysts said looked too high.
"The country needs to try to 'normalise' and overcome the YPF incident in order to attract foreign investment, and its friends are trying to help out," Societe Generale said in a note to clients.
One of those friends is Mexican state-owned oil company Pemex - Repsol's third biggest shareholder with a 9.2 percent stake.
YPF called on Pemex to broker a deal with Repsol in exchange for a small stake in Vaca Muerta, sources with knowledge of the matter said.
It also gave a condition for the deal: the exit of Repsol chairman Antonio Brufau, the sources said. Brufau and Fernandez have been at odds since the YPF expropriation.
Brufau, chairman of Repsol since 2004, is widely respected by minority shareholders for converting the company from a downstream oil refinery into a large integrated oil firm, but he has been the target of internal power struggles in the past.
He survived an attempt by the former chairman of shareholder Sacyr to oust him in 2011, but the possibility of further turmoil is an open topic of debate in political and business circles and the Spanish media.
Pemex's role in the YPF talks springs from a complex web of cross shareholdings involving Mexican business magnate Carlos Slim and another core Repsol shareholder, lender La Caixa . La Caixa also made a failed attempt to seal a deal with YPF earlier this year without the direct knowledge of Brufau, two sources said.
Societe Generale said Repsol would be better served by holding out for a better offer, and questioned whether the big shareholders were favouring their own interests over those of the firm by promoting a deal.
"It is pleasing to Repsol investors that its board has rejected this attempted deal. It is worrying that the proposal indicates a willingness by its largest shareholders to interfere by proposing solutions that go totally against the interests of the majority of Repsol shareholders," Societe Generale said.