UPDATE 3-S&P cuts Argentine debt rating

(Adds Economy Ministry source, description of S&P rating, Brazil background)

By Walter Bianchi

BUENOS AIRES, Aug 11 (Reuters) - Standard & Poor's cut its sovereign debt ratings for Argentina on Monday, underscoring market concerns about inflation and the financing outlook for Latin America's No. 3 economy.

The center-left government, which embarked on a debt buyback program on Monday to calm investor jitters, defended the health of the economy after S&P said it had cut the country's sovereign debt ratings one notch from "B+" to "B", five levels below investment grade.

"We absolutely don't agree with the principles of the decision that's been taken," said an Economy Ministry source, who spoke on condition of anonymity. "The fundamentals of the Argentine economy are solid."

S&P's B rating puts Argentina deep within the speculative grade area. That means there are only a few steps down before the country is determined to be in default.

"Inflation and fiscal and financial strain have increased while the likelihood of the government taking prompt corrective measures to staunch the loss of credit-worthiness remains low," said S&P sovereign credit analyst Sebastian Briozzo.

The ratings agency's move highlights the differences between Argentina and its neighbor and Mercosur trade group partner Brazil, which has been assigned the coveted investment grade by two of the three major ratings agencies in the last few months.

Argentina has budget and trade surpluses and the economy has grown rapidly for more than five years, but it faces rising debt obligations in 2009, inflation is high, and prices for its top export earner, soy, have slumped in recent weeks.

Argentine debt prices tumbled late last week on concerns about the country's financing outlook, sending bond spreads to their highest level since Argentina's 2005 restructuring of about $100 billion in debt, after a three-year default.

BUYBACK

But on Monday prices rebounded on news of the buyback plan, which the Economy Ministry source said had already begun and would continue in the coming days.

The government said it was repurchasing peso- and dollar-denominated bonds maturing this year and next to take advantage of low market prices.

The dollar-denominated Par bond maturing in 2038 ARGGLB38=RR gained 1.250 points to bid 31.25 in price with a yield of 10.829 percent.

Yields on Argentina's foreign-currency-denominated bonds narrowed 60 basis points to 669 basis points over U.S. Treasuries, according to JPMorgan's Emerging Markets Bond Index Plus (EMBI+) 11EMJ .JPMEMBIPLUS.

A narrower spread over Treasuries is seen reflecting less perception of risk on the part of investors.

The government has not said how much money it would spend on the buyback of Bonar and Boden paper, but the leading daily newspaper Clarin reported it could initially be $250 million but potentially as high as $1 billion.

SKEPTICISM

However, analysts warned the buyback scheme would not be enough to restore faith in the country's economic management, citing persistent investor criticism of inflation data.

Economists and consumer groups accuse the government of under-reporting inflation for political gain and to reduce payments on inflation-indexed debt.

Marina Dal Poggetto, director of Estudio Bein economic consultancy, the INDEC issue was seen by some in the markets as "a virtual default on the bonds linked to inflation." Official numbers put annual inflation at about 9 percent, but private estimates say it is above 25 percent.

Bond prices also were hit last week by news the country -- which is largely shut out of international capital markets after its default -- had sold seven-year bonds to Venezuela at yields above 15 percent, among the highest in the world. (Additional reporting by Hilary Burke and Daniel Bases in New York; Writing by Kevin Gray and Helen Popper; editing by Carol Bishopric)