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UPDATE 1-Sri Lanka's bonds slump after U.S. calls for "difficult" choices over China ties

* Bonds tumble as U.S. warns govt to make tough choices over China

* China hits back accusing Washington of bullying

* Default worries are rising fast, debt nearly 100% of GDP (Adds detail, background)

LONDON, Oct 23 (Reuters) - Sri Lanka’s government bonds fell heavily on Friday after the United States urged the country’s government to make “difficult but necessary choices” regarding its ties with China.

Worries that this year’s COVID-19 crisis could see the country struggle to pay its debts have already seen its bonds slump almost 40% this year.

On Friday its 2021 and 2022 dollar-denominated bonds dropped 5 cents or more, according to Tradeweb data. Meanwhile its 2025 and 2026 bonds dropped below the 60 cents on the dollar threshold.

“We encourage Sri Lanka to review the options we offer for transparent and sustainable economic development in contrast to discriminatory and opaque practises,” U.S. State Department official Dean Thompson told reporters ahead of Secretary of State Mike Pompeo’s visit to Sri Lanka and other parts of Asia next week.

“We urge Sri Lanka to make difficult but necessary decisions to secure its economic independence for long-term prosperity,” Thompson added.

China’s foreign ministry spokesman dismissed the comments as showing a “Cold War mentality” and said the U.S. was bullying countries to pick sides over their ties.

Sri Lanka’s finances were fragile long before the coronavirus blow, but unless the country can win support from its allies it runs the risk of having to default.

All the tell-tale crisis signs are there: a tumbling currency, credit rating downgrades, bonds at half their face value, debt-to-GDP levels nearing 100% and almost 70% of government revenues being spent on interest payments alone.

Sri Lanka’s central bank has repeatedly vowed however that the country will “honour all its debt service obligations”.

External debt payments between now and December amount to $3.2 billion. Other costs could bring that up to $6.5 billion in the next 12 months, analysts estimate, while its FX reserves of just $7.4 billion leave it barely covered. (Reporting by Marc Jones, editing by Karin Strohecker)

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