* Chaco shook debt markets by paying interest in pesos
* Swap would cover about $30 million in dollar bonds
* Currency controls mean province unable to buy dollars
* Moody's downgrades provincial, municipal ratings
BUENOS AIRES, Oct 17 Argentina's Chaco province will offer to swap about $30 million in dollar-denominated debt for peso bonds because authorities are unable to buy greenbacks due to currency controls, a local government source said on W edn esday.
The central bank refused to let Chaco buy dollars on the foreign exchange market earlier this month, so the northern province repaid creditors about $260,000 in pesos on dollar-denominated bonds issued under Argentine legislation.
Rating agency Moody's described Chaco's move as a default and then downgraded a host of Argentine provincial and municipal debt ratings to reflect the heightened uncertainty. Argentina's economy minister has accused ratings agencies of issuing "terrorist" reports.
The source at Chaco's provincial economy ministry said details of the voluntary debt swap offer could be announced in the next few weeks.
"The idea is to retrieve the bonds in dollars. Obviously the offer should compensate for the fact that they are no longer in dollars ... so it's attractive to the market," the source said, speaking on condition of anonymity.
National and provincial bond prices sank last week in the wake of Chaco's decision to pay its dollar obligations in pesos.
President Cristina Fernandez has limited access to dollars in the last year to stem capital flight. This was the first time a province was unable to buy greenbacks due to the restrictions.
The central bank said the currency limits affect only a small amount of dollar debt issued under Argentine law. It said debtors who issued bonds under foreign legislation would be able to buy foreign currency to service that debt.
The two bonds eligible for Chaco's voluntary debt swap were issued in 2006 with a coupon of 4 percent and maturities in 2015 and 2023. Some $10 million is outstanding on the first bond, with about $22.2 million left on the longer-term issue, according to the Economia y Regiones consulting firm.
Chaco's plan to issue new peso bonds "formalizes a de facto situation," said Boris Segura, a fixed income strategist at Nomura investment bank. "It is clear that the dollar-denominated Chaco bonds have been pesified already by the central bank, by denying dollar access to the province to service them," he wrote in a note.
Segura said he did not expect other issuers such as Buenos Aires province, the capital, or Cordoba province to follow in Chaco's footsteps.
Moody's downgraded Argentine provincial and municipal credit ratings on Wednesday, arguing that they faced "growing risks ... to access foreign currency in an environment of increasingly restrictive policies by the central bank."
With the exception of Formosa province, which was placed under review for a possible downgrade, all the new ratings were given a negative outlook to reflect deteriorating conditions in Argentina, including an economic slowdown and rising fiscal and foreign exchange pressures.
"The lack of consistent and predictable policies at the national level affects the institutional framework under which provinces and municipalities operate and ultimately anchors their credit quality to that of the sovereign," Moody's said.
The city of Buenos Aires' foreign currency debt rating took a big hit, knocked down two notches to Caa1. This put it under the sovereign B3 rating and in line with other downgraded provinces, such as Buenos Aires province and Cordoba.
Moody's also sharply downgraded the local currency debt ratings of Chaco and Formosa provinces, the two districts most directly affected by the central bank's restrictions.
Argentina, Latin America's No. 3 economy, has been virtually shut out of international credit markets since it staged the world's biggest-ever sovereign debt default at the height of a 2001-02 economic crisis.