UPDATE 2-Argentine dollar bonds sink on Chaco news
* Province makes dollar-denominated debt payment in pesos
* Argentina restricts dollar access to slow capital flight
By Jorge Otaola
BUENOS AIRES, Oct 9 (Reuters) - Argentina's dollar-denominated sovereign bonds slid lower on the local market on Tuesday, the first day of trading since Chaco province said it would pay some of its dollar-denominated obligations in local pesos.
The national government has tried to stem capital flight this year by cracking down on access to U.S. dollars. The controls have limited the ability of borrowers to repay dollar-denominated debt using greenbacks.
Tuesday's bond sell-off was led by the country's Par bonds , which shed 3.3 percent in over-the-counter trade, according to the bid price. Bonar 2017 bonds were down 2.4 percent in mid-afternoon trade.
Monday was a holiday in Argentina and markets were closed.
Chaco's payment last week of about $260,000 in pesos sparked fear that other Argentine borrowers may start repaying their U.S. dollar debts in pesos as well, in effect foisting a weaker currency on investors who had contracted to receive dollars.
The province confirmed over the weekend that the payment was made in the local peso currency, which trades at about 4.71 per dollar on the official foreign exchange market.
Rating agency Moody's Investors Service said it was still weighing the credit implications of the province'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."
Analysts at Barclays said that, while the province could be pushed into selective default, investors should consider buying on price dips.
"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 Alejandro Grisanti and Sebastian Vargas.
External law refers to bonds that are issued outside Argentina, under US legislation, for example. There is a crucial difference between such bonds and the ones paid by Chaco, which were issued under Argentine law.
"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.
On the black market, Argentina's peso trades at around 6.20 per dollar. The spread between the official rate and the parallel rate began to widen a year ago, when the government first imposed limits on foreign currency purchases.