Argentine bond prices plunge again on currency fears
* Chaco confirms dollar debt payments will be made in pesos
* Investors fear other provinces could follow suit
By Jorge Otaola and Walter Bianchi
BUENOS AIRES, Oct 10 (Reuters) - Argentine bonds continued to lose ground on Wednesday due to investor fears that other borrowers could follow Chaco province's lead and pay dollar-denominated debts in pesos, traders said.
Chaco's government could not buy dollars on the local foreign exchange market last week due to currency controls, so it ordered creditors be repaid about $260,000 in pesos on dollar-denominated bonds issued under local legislation.
Leftist President Cristina Fernandez has tried to stem capital flight by limiting access to U.S. dollars in the last year. This is the first time a province has been unable to buy greenbacks due to the controls.
To help shore up confidence in local debt, Argentina's central bank on Wednesday said the national government and local entities that issue dollar-denominated foreign bonds will have access to U.S. currency needed to service and repay debt.
Argentina has been seen as a risky bet since it defaulted on a world-record $100 billion in sovereign debt in 2002 at the height of a crippling economic crisis. It later restructured most of that debt at a huge loss to bondholders.
Wednesday's sell-off was led by the country's dollar-denominated 2017 Bonar bond, which was down 3.34 percent in over-the-counter trade, according to the bid price.
Argentina's Discount paper was trading 2.05 percent lower, while dollar-denominated Par bonds were down 1.77 percent in mid-afternoon trade.
"The declines are due to heightened uncertainty and distrust," said Augusto Farina, a trader at Amirante Gallitis brokerage.
Although Chaco province gave the payment order in pesos, the Caja de Valores clearinghouse h as refused to transfer the money to creditors - an unusual move that was criticized by the central bank and the country's stock market regulator.
"The Caja (de Valores) can't deposit the pesos that Chaco wants to use to pay because this would be like returning pears to someone when you promised to give them apples," a source at the Buenos Aires Stock Exchange said on condition of anonymity.
Chaco's governor, Jorge Capitanich, said the province will keep using pesos to make monthly payments on its BOSAGAR bonds, issued under local law.
"The bondholders will receive deposits in pesos in their individual accounts, in line with the central bank's currency regulations," Capitanich, an ally of President Cristina Fernandez, told a news conference on Wednesday.
The central bank has said its restrictions on dollars only apply to a handful of dollar-denominated bonds issued under Argentine law by Chaco, Tucuman and Formosa provinces.
Some Argentine sovereign bonds, provincial paper and corporate debt have been issued under U.S. legislation because this is a way to give greater security to creditors and lower borrowing costs.
The central bank said these debtors will not have difficulty buying foreign currency to service debt, but investors are wary nonetheless.
"Clearly not selling dollars to a small province is frightening," a senior New York-based trader told Thomson Reuters news service IFR. "You can speculate that this is part of a bigger plan on behalf of the government. We just don't know, given the administration's behavior over the last couple of years."
BUENOS AIRES PROVINCE
Prices for certain Buenos Aires provincial debt fell after the deputy governor of Argentina's biggest and most productive province said he would support a decision by Gov. Daniel Scioli to pesify dollar debts if he decided to.
Buenos Aire's 2018 dollar-denominated paper plunged 6.91 percent, pushing implicit yields to around 18.6 percent.
"I think what happened was a very good thing and Daniel (Scioli) will have to coordinate it with his economy minister," Deputy Gov. Gabriel Mariotto told local radio. "C haco's precedent is very important."
Mariotto and Scioli, who is seen as more market-friendly, are at odds politically even though they both belong to the ruling Peronist party.
President Fernandez has said she wants Argentines to stop thinking and operating in dollars and use their own national currency instead. Many Argentines save in greenbacks to hedge against devaluations, which have burned them in the past.
Five-year credit default swaps (CDS) on Argentine government debt have jumped nearly 130 basis points since Friday to 1035 bps, according to data monitor Markit. This means it costs $1.035 million annually to buy $10 million of protection against an Argentine default.
Wednesday's levels were still far below the 1515 basis points hit on June 1, when Argentine CDS values spiked on a previous round of debt pesification fears.
Argentina's peso currency trades at around 4.71 per dollar on the official foreign exchange market and at about 6.20 per dollar on the black market. The spread between the two rates began to widen a year ago when the government first imposed limits on foreign currency purchases.
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