* Province makes dollar-denominated bond payment in pesos
* Argentina restricts dollar access to slow capital flight
* Some analysts downplay risk to debt issued abroad (Recasts; adds comments from trader, provincial bond prices)
By Jorge Otaola and Walter Bianchi
BUENOS AIRES, Oct 9 (Reuters) - Argentine bond prices slid on the local market on Tuesday, the first day of trading since the province of Chaco rattled investors by paying some dollar-denominated debt obligations in local pesos.
The country’s left-leaning government has tried to stem capital flight by tightening access to U.S. dollars in the last year. The currency controls have limited the ability of borrowers to repay dollar-denominated debts using greenbacks.
Chaco said last weekend that the Argentine central bank prevented it from buying dollars on the foreign exchange market so it was forced to repay creditors about $260,000 in pesos. This sparked fears that other Argentine borrowers could follow suit, foisting the weaker local currency on creditors who contracted to receive payment in dollars.
This is not the first time the rules have been changed for Argentina’s creditors. The country suffered the world’s largest sovereign default in 2002 during a crippling economic crisis and restructured an estimated $100 billion debt at a huge loss to bondholders.
The move affected two of Chaco’s bonds issued under Argentine law. The central bank said debtors that must service dollar bonds issued under foreign legislation would be able to buy the U.S. currency, but some investors were skeptical.
“The Chaco thing had a big impact on all bonds, especially those of Buenos Aires province since doubts flared up again about fulfillment” of its obligations, said Jorge Alberti, a trader at online brokerage ElAccionista.com.
Analysts at Barclays were more sanguine, although they said Chaco could be pushed into selective default.
“Our expectation is not a ‘pesification’ of provincial or corporate external law bonds and we would not recommend selling on the back of this news,” wrote Barclays analysts Alejandro Grisanti and Sebastian Vargas.
“We would be buyers of Bodens and Bonars on weakness due to this particular news as our perception of credit risk has not changed over the weekend,” they added.
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.
Among Argentina’s provinces, only Chaco, Chubut, Formosa and Tucuman have outstanding dollar-denominated bonds issued under local law. They owe about $250 million total on this debt, according to JPMorgan.
Tuesday’s sell-off was led by the country’s Discount paper , which shed 4.5 percent in over-the-counter trade, according to the bid price. The country’s dollar-denominated Par bonds closed 2.66 percent lower.
These losses dragged banking shares down on the Buenos Aires stock exchange since Argentine banks have hefty debt holdings. Markets were closed in Argentina on Monday for a holiday.
Prices for Buenos Aires province’s 2015 dollar bond sank 5.31 percent while its 2018 dollar-denominated paper ended down 4.58 percent.
The stock exchange sent a note to the central bank requesting clarification on its policies, citing uncertainty in the market over whether corporations would be able to buy foreign currency to service their debt.
Credit ratings agency Moody’s Investors Service said it was still weighing the credit implications of Chaco’s move.
“The Province of Chaco is rated at B3 with negative outlook. Such rating suggests high credit risk,” Patricio Esnaola, an analyst with the sub-sovereign team at Moody’s, said in a statement.
“The operating environment where Argentine sub-sovereigns operate has substantially deteriorated, weakening their capacity to serve their obligations in foreign currency.”
Argentina’s peso currency trades at 4.71 per dollar on the official foreign exchange market and at 6.18 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. (Additional reporting by Luciana Lopez in New York and Guido Nejamkis in Buenos Aires, writing by Hugh Bronstein and Hilary Burke; editing by Theodore d’Afflisio, Gary Crosse)