BUENOS AIRES, June 4 (Reuters) - The Argentine government said on Thursday it would loan $70 million to the local affiliate of U.S. automaker General Motors Corp GMGMQ.PK, which declared bankruptcy this week, to finance the production of a new compact car for South America.

Argentine auto production plummeted 35 percent in the first five months of the year, compared with the same period last year, due to the global recession but the government has pressed automakers to retain workers as much as possible.

President Cristina Fernandez announced the loan at the GM plant in Argentina and said the loans would be financed out of the public social security fund and the company put up its plant and inventory as guarantee.

GM Argentina, which is financially independent from GM and did not enter into the bankruptcy, plans to begin producing a new compact model at the end of this year for sale in Argentina and other countries in the region.

The loan from the government will finance 58 percent of the new project.

The loan will be paid back in 120 payments and the floating interest rate is 600 basis points over the BADLAR reference rate (the average rate for 30-35 day deposits), the president said. The BADLAR stood at 13 percent on June 2.

Argentina produced a record 597,086 vehicles in 2008 and neighboring Brazil is its main market for cars.

(Reporting by Damian Wroclavsky; Writing by Fiona Ortiz)