* Payment of dollar debt in local currency may set precedent
* Province cites central bank crackdown on dollar buying
* Argentina restricts dollar access to slow capital flight
By Hugh Bronstein
BUENOS AIRES, Oct 7 Argentina's Chaco province
set a worrying precedent for investors last week by making a
dollar-denominated bond payment in local pesos, saying it was
forced to do so by the central bank's policy of limiting access
The payment of about $260,000 in pesos rather than U.S.
dollars surprised the local capital markets, and may set the
stage for other borrowers in the South American country to pay
dollar-denominated debt in pesos.
"Compliance in a timely manner of the obligation was carried
out in accordance with existing foreign exchange regulations
established by the Central Bank of Argentina," said the northern
The central bank has cracked down on access to dollars this
year to protect its reserves and stem capital flight as the peso
weakens against the greenback. The Chaco bonds were issued in
2006 and come due in 2015 and 2023.
"This sets a very concerning precedent," Goldman Sachs
emerging markets analyst Alberto Ramos said of the payment not
being made in dollars as called for in the bond contracts.
"The irony is that the government wants desperately to hold
on to every dollar that it can find, but it is denying the same
right to its own citizens," he added. "There are multiple sound
reasons why people favor the dollar in Argentina."
The country, with its vast Pampas farm belt, is a top world
grains supplier. Rising soy and corn prices have helped it
recover from a severe 2001-2002 financial crisis punctuated by a
massive sovereign debt default.
The crisis was followed by a long economic boom which has
since lost steam, leaving double-digit inflation in its wake.
President Cristina Fernandez has meanwhile beefed up
intervention in Latin America's No. 3 economy, imposing currency
controls along with import curbs and new lending requirements
that have raised jitters among local bankers.
These measures, along with the government's decision this
year to seize a majority stake in Argentina's top energy
company, YPF, have further dented investor confidence.
Hit as well by fallout from Europe's debt crisis, lower
demand from key trade partner Brazil, the country's economic
expansion came to a screeching halt in the second quarter of
this year, according to government data.
"Now it appears that Chaco cannot meet its obligations. You
would think that a semi-sovereign entity such as a province
would be able to access the dollars it needs," said Beth
Morrissey, managing partner at Washington-based emerging markets
consultancy Kleiman International.
"The scary question is whether this the first of many, and
will we have pesification of all dollar-denominated debt in
Argentina," she said.