Emerging debt-Argentina falls on tough talk, Mexican peso rises

*Argentine assets hurt by President's tough talk

*U.S. rate decision Tuesday keeps trading light

*Mexican peso reaches six-year high.

By Daniel Bases

NEW YORK, Aug 4 (Reuters) - Investors bailed out of Argentine assets on Monday in response to tough talking President Cristina Fernandez who defended her government's actions over a now defeated agricultural tax and inflation statistics.

Argentina was the biggest loser in the emerging market sphere, underperforming on stocks, bonds and credit default swaps. The sector started on a weak note with declines in Asian stock indexes that migrated across the time zones and left Latin American stocks shaken.

Adding to the sour mood was higher-than-expected U.S. core inflation data that put some selling pressure on U.S. stocks and Treasuries, thereby undermining emerging market credits.

Tuesday's U.S. interest rate policy meeting was blamed for the light trading volumes. The Federal Reserve is expected to leave benchmark interest rates unchanged at 2.0 percent as it grapples with a faltering economy, shaky financial system and rising prices.

However a decline in oil prices relieved some of the selling pressure in afternoon New York trade.

The Morgan Stanley Capital International emerging markets stock index .MSCIEF fell 1.98 percent while the Latin American index .MILA00000PUS fell 3.53 percent.

Argentina's Merval index .MERV lost roughly 3.78 percent to a near one-year low around 1,812.75.

Fernandez, who was forced to ditch a controversial tax increase on soy exports, said her only mistake was to underestimate the opposition to her tax plan and that if given the chance she would not have changed her actions.

She also defended government inflation statistics, widely discredited, which puts the consumer price index up about 9.0 percent a year versus private estimates of 20 percent or more.

"Investors seem to be showing concern about the fact that the president didn't show any sign in reforming or changing the INDEC and her assertion that she would have handled the tax issue in the same way if she had the chance. That's got people nervous again," said Benito Berber, Latin America strategist at RBS in Stamford, Connecticut.

In the credit markets, Argentina's five-year credit default swaps illustrated investor fears that the political environment remains tense and the government recalcitrant in light of its defeat on the tax issue.

"Argentina just keeps getting heavier and heavier. Inflation is running high and the government is sticking with these discredited statistics," said one senior trader at a German bank in New York.

Five-year CDS rates widened by roughly 16 basis points to a mid-point 741 basis points from Friday's 725, according to trading sources.

CREDIT PLANS

At the same time, Argentina's government reported on Monday that it can meet its 2008 financing needs without issuing debt on financial markets and instead could tap its budget surplus or take intra-government loans from public agencies.

The sale of debt to Venezuela, something it has done in the past, is also a possibility although no talks are under way.

Venezuela said it was willing to buy more bonds, having purchased more than $6 billion in Argentine debt already.

In the credit markets, the JP Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS yield spread over benchmark U.S. Treasuries narrowed by one basis point to 286 basis points.

Argentina's portion of the EMBI+ widened by 29 basis points to 654 basis points, resulting in a 2.48 percent decline in total returns for the day.

MEXICAN PESO UP

The Mexican peso MXN=MEX01 hit a six-year high of 9.8745 per U.S. dollar as a drop in oil prices eased fears about the global economic impact of high fuel costs plus expectations the central bank will raise interest rates again.

Light Sweet crude oil fell $4.05 a barrel, or 3.24 percent, to $125.10 on Monday due to increased OPEC output and the threat to demand from economic slowdown. This trumped concerns about a tropical storm and Iran's nuclear dispute with the West.

Peru's sol climbed roughly 0.90 percent on the day on the expectation of improvement in the local economy, which is fueled by mineral exports. The sol traded around 2,770/2,774 per U.S. dollar versus prior close of 2,797/2,799 PEN=PE.

Among the weaker currencies, Chile's peso fell to a four-week low as the slide in oil prices helped lift the U.S. dollar. The peso CHILJCLP=CL weakened 1.17 percent to end at 511.00/511.50 per dollar from Friday's close at 505.00/505.50.