* Formosa province has dollar bonds issued under local law
* Provinces cannot service this debt due to controls
* Formosa creditors agree to accept payments in pesos
BUENOS AIRES, Nov 9 (Reuters) - Argentina's northern Formosa province convinced creditors on Friday to accept payments in Argentine pesos on a 2022 dollar-denominated bond, due to tough currency controls that block access to greenbacks.
Formosa held a bondholders assembly to revise the terms of the "FORM3" bond issued under local legislation. The move came a month after neighboring Chaco province repaid similar dollar debt with pesos because the central bank barred it from buying the U.S. currency on the local market.
Chaco's decision roiled local financial markets, stirring memories of Argentina's massive sovereign debt default in 2002, when a severe economic crisis shook the country.
That province has said it plans to swap its local dollar debt for peso bonds.
In the case of Formosa, the province still owes about $42 million on the FORM3 bond.
"We have proposed paying in Argentine pesos at the exchange rate of the day ... and they have accepted," provincial economy minister Jorge Ibanez said.
Ibanez said 86 percent of creditors voted in favor of the change, well above the 75 percent needed for the proposal to be approved.
President Cristina Fernandez's left-leaning government has imposed strict currency controls over the last year to stem capital flight and protect the central bank's international reserves, used for repaying government debt.
The central bank has said that only a handful of provincial bonds, which were issued under Argentine law, are affected by the currency controls. Debtors who sold dollar-denominated paper under foreign legislation will still be able to buy the U.S. currency to service their debt.
Besides Formosa and Chaco, the only other province that has dollar debt issued under Argentine law is Tucuman, another small northern region.
Formosa is one of Argentina's poorest provinces, located along the border with Paraguay. Chaco is just south of Formosa.