October 23, 2012 / 3:45 PM / 5 years ago

Argentina's Formosa province seeks to change dollar bond terms

* Formosa has dollar bonds issued under local law

* Chaco had to repay similar dollar debt in pesos

* Government currency controls aim to curb capital flight

BUENOS AIRES, Oct 23 (Reuters) - Argentina’s northern Formosa province on Tuesday summoned creditors to discuss how to “adapt the terms and conditions” of a dollar-denominated bond in light of central bank currency controls.

In a statement to the Buenos Aires stock exchange, Formosa said it would hold a bondholders assembly on Nov. 9 to revise the terms of the “FORM3” bond due in 2022 and issued under local legislation.

Private analysts estimate that Formosa still owes about $41 million on the FORM3 bond. The next payment comes due Nov. 27.

The move comes just weeks after Chaco province had to repay dollar debt using Argentine pesos because the central bank barred it from buying greenbacks on the local foreign exchange market. Chaco has said it plans to swap the dollar debt, issued under local law, for peso bonds.

Chaco’s decision roiled local financial markets, stirring memories of Argentina’s massive sovereign debt default in 2002 when a severe economic crisis shook the country.

President Cristina Fernandez’s left-leaning government has imposed strict currency controls over the last year to stem capital flight and protect the central bank’s international reserves, used for repaying government debt.

The Moody’s rating agency, which called Chaco’s peso payment a “default,” downgraded Argentine provincial and municipal credit ratings, arguing the local governments faced “growing risks ... to access foreign currency in an environment of increasingly restrictive policies by the central bank.”

The central bank has said only a handful of provincial bonds, which were issued under Argentine law, are affected by the currency controls. Debtors who sold dollar-denominated paper under foreign legislation will still be able to buy the U.S. currency to service their debt.

Formosa is one of Argentina’s poorest provinces, located in the far north of the country along the border with Paraguay. Chaco is just south of Formosa.

Besides Formosa and Chaco, the only other province that has dollar debt issued under Argentine law is Tucuman, another small northern region.

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