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March 17 (Reuters) - Moody's Investors Service cut Argentina's government bond rating further into junk on Monday, saying a sharp drop in central bank dollar reserves has raised concern about the country's ability to service foreign debt.
The credit ratings agency downgraded the rating to 'Caa1' from 'B3,' and revised its outlook to stable from negative.
A major driver behind the decision to downgrade came from tumbling levels of foreign exchange reserves, which Moody's analyst Gabriel Torres called a "semi-freefall."
"What we're going to be looking at more than anything now is reserves," said.
"If Argentina enhances its funding options, whatever that may be - from tapping markets, to greater bilateral lending, to greater capital inflows, to whatever the options are that make it easier for them - then those are all credit positive actions," Torres said.
The country's reserves have plunged to $27.5 billion from a high of $52.7 billion in 2011, according to Moody's.
Argentina has been cut off from international capital markets since its 2002 sovereign bond default, while other potential investment has been chased away by high inflation.
The central bank uses its international reserves to make payments on the government's foreign debt, finance imports and prop up the overvalued peso currency through regular interventions in the foreign exchange market.
The grains-exporting country could access IMF funding, Torres said, "but they would have to have a completely different relationship with the IMF than they have today."
Argentine President Cristina Fernandez has won popular support by criticizing the IMF's orthodox policy prescriptions for the country's economic woes, which include annual inflation estimated by private economists at more than 30 percent, one of the highest rates in the world.
Argentina, which at the start of the 20th century was one of the richest in the world, has been weakened by decades of financial mismanagement. Its boom-bust cycles reached an apex when the 2002 crisis tossed millions of middle-class Argentines into poverty.
Investors are guardedly optimistic that the next leader of Latin America's third-largest economy will adopt more market-friendly policies. Fernandez's second term ends late next year.
The Paris Club last week invited Argentina to negotiate payment of its overdue debt. Talks starting in the week of May 26 could be an important step toward settling the long-running debt dispute and paving its re-entry into the debt markets.
The website of the Paris Club, an informal group of official creditors, says that the Club met for the first time in 1956 at the behest of Argentina, which was concerned about defaulting on its sovereign debt.