The yield on the province's dollar-denominated 2015 bond closed on Thursday at a near-record high of 27.5

BUENOS AIRES, July 6 (Reuters) - A cash crunch in Argentina's biggest province, Buenos Aires, is driving bond yields higher due to increasing investor doubts about the local government's ability to pay its debts as ties with President Cristina Fernandez sour.
The provincial government of Buenos Aires, which accounts for more than a third of Argentina's economic output, announced a raft of cost-cutting measures this week and plans to pay a bonus to public sector employees in installments.

Center-left Fernandez has only partially heeded to appeals for financial aid from Gov. Daniel Scioli, a former ally of the president who is increasingly seen as a potential successor to her in a presidential election in 2015.

The yield on the province's dollar-denominated 2015 bond closed on Thursday at a near-record high of 27.5 percent, more than 11 percentage points above a similar sovereign bond and almost twice the rate it paid at the start of May.

Provincial dollar-denominated bonds maturing in 2017 and 2018 remained close to their three-year highs of 25.63 percent and 22.58 percent, respectively.

"The returns are juicy because the province's ability to pay is being put in doubt," a government-debt trader said on condition of anonymity.

However, others say a default is highly unlikely and point to Scioli's austerity measures as a sign his government is committed to paying its debts.

"No one thinks there's going to be a default, but the current financial problems do generate uncertainty about the future," said Francisco Marra of Buenos Aires-based brokerage Bull Market Brokers.

"The market is starting to speculate with these problems. The provincial government should take some kind of measure to help calm investors," he added.

Scioli, a former speed-boat racer and seen as a centrist, will ask Congress next week to declare an economic emergency. That would let his administration reallocate budget resources, pay providers with bonds and salaries in installments.

Buenos Aires faces debt payments over the coming months in dollars and euros for a total of $740 million. The district said on Monday it would pay $40.8 million in interest on its 2021 bond on July 26.

Argentina's economy, Latin America's third largest, is slowing sharply after a long boom, cooling tax revenue growth at the same time that double-digit inflation fuels wage demands.

The provinces are especially vulnerable to slowing tax revenue because about 60 percent of spending goes to wages, giving them little margin to balance the books.

Buenos Aires is not the only province facing a spiraling deficit, but Fernandez suggested the shortfall was due to Scioli's "mismanagement."