UPDATE 3-Argentina to tap reserves for debt payment fund

(Updates with details on fund)

By Kevin Gray

BUENOS AIRES Dec 14 (Reuters) - Argentina will set aside $6.57 billion of its foreign currency reserves to ensure the country meets its 2010 debt payments, the government said on Monday in a move aimed at lowering its costs of issuing new debt.

The fund is intended to remove doubts about Argentina's ability to pay and could be used to make payments on government bonds or debt with multilateral lending organizations, Economy Minister Amado Boudou said in a nationally televised address with President Cristina Fernandez.

"The objective of this fund is to give the maximum level of assurance," he said.

Analysts said the decision could give Argentine debt prices a boost in the short term. But some said that using reserves instead of fiscal surplus to pay debt was a worrying sign.

Argentine sovereign bonds traded locally rose an average 1 percent in mid-day trading, according to Reuters data.

The announcement comes as Argentina is moving to reach a restructuring deal with holders of some $20 billion in defaulted debt in a bid to return to international credit markets eight years after a massive debt default.

Some private analysts say South America's No. 2 economy could face a financing gap of as much as $7 billion next year, including funding for the country's provinces.

Argentina's primary budget surplus -- a gauge of its ability to service its debt -- has shrunk in recent months as a slowing economy has reduced tax revenue and the government has increased spending in an attempt to offset the slowdown.

The fund is a "rational" idea and will tap "excess" reserves, Fernandez said. Argentina's reserves currently stand at $47.54 billion.

Alberto Ramos, a senior economist at Goldman Sachs, said the government's decision was "bullish" for Argentine short-term debt.

"But it is clearly negative from an institutional standpoint as it weakens the central bank and provides the government with extra rope to extend a notoriously profligate spending stance that is often shaped according to political criteria," he said in a research note.

Market conditions are ripe for a country like Argentina to issue new debt because risk appetite has soared and investors are eyeing attractive interest rates in emerging market assets at a time when developed countries are paying low rates.

But Argentina's financial past is expected to make the cost of issuing debt higher than in other countries, and Boudou has said he would like to see Argentina return to global credit markets paying a single-digit interest rate.

Fernandez said the new fund should put investors at ease.

"In addition to making sure we can pay our debts, we are at the same time sending a strong message to the market that we're not going to accept just any interest rate," she said.

Carola Sandy, a New York-based strategist with Credit Suisse, said the news was "positive" for bondholders.

"I think the immediate consequence is that prices for bonds are going to go up and borrowing costs will compress. The government's objective now seems to be to issue in capital markets at reasonable rates," she said.

(Additional reporting by Nicolas Misculin and Walter Bianchi; Editing by Dan Grebler)