July 27 (Bloomberg) -- Argentine provinces, whose swelling debt contributed to the government’s 2001 default, are poised to step up bond sales again as budget deficits almost triple.

Plans by Cordoba, the nation’s third-biggest province by gross domestic product, to sell bonds may be the first in a wave of issues as the global recession cuts tax revenue from exports, said Patricio Esnaola, a Buenos Aires-based analyst who rates local governments for Moody’s Investors Service. Buenos Aires province and city are considering plans to raise $1.3 billion.

“The provinces are going to have financing needs this year, so they are watching to see what happens with Cordoba,” Esnaola said in a telephone interview. “If Cordoba has good results, this could be a trigger for the rest to do the same.”

The total deficit of Argentina’s 23 provinces and the city of Buenos Aires may jump to 9.8 billion pesos ($2.6 billion) this year from 3.4 billion pesos in 2008, according to Economia & Regiones, a Buenos Aires-based research firm that focuses on regional financing. All but five of the provinces will have a budget gap this year, the firm’s data show.

Cordoba, an industrial and cattle-ranching province that forms the northern edge of the Argentine pampas, may post a deficit of 800 million pesos this year, according to Economia & Regiones. The government plans to sell $150 million of dollar- linked bonds next month and present the plan to investors at the Cordoba Stock Exchange this week, a person familiar with the plan said.

Cordoba will likely sell most of the bonds to federal social security agency Anses and state-run Banco de Cordoba, Esnaola said. A spokesman for the province’s Finance Ministry didn’t return calls seeking comment.

Debt Default

President Cristina Fernandez de Kirchner’s administration approved Cordoba’s bond sale in December. The consent is a requirement for all provinces and cities under a 2004 law enacted after surging debt sales contributed to the nation’s record default on $95 billion of bonds in 2001.

Provinces spent 20.6 percent of their revenue servicing debt in 2001, compared with an estimated 7.7 percent this year, according to Economia & Regiones. Most also defaulted amid riots that led to the ouster of then-President Fernando de la Rua and the abandonment of the peso’s one-to-one peg to the U.S. dollar.

The requirement for federal approval stalled the city of Buenos Aires’ plan to sell up to $500 million in dollar bonds last year. The city has sold 485 million pesos in short-term notes to meet financing needs, said Abel Fernandez, the city’s public credit chief.

Fernandez Meetings

A bond sale may still be a financing option after Buenos Aires Mayor Mauricio Macri met last week with the president, a political opponent, for the first time since she took office in December 2007, Fernandez said. The president also met last week with three provincial governors to discuss funding needs following the defeat of her ruling coalition in midterm elections on June 28.

“The federal government uses the law to put the brakes on bond sales or as a negotiating tool with provinces,” said Miguel Kiguel, a former finance under secretary who now serves as director of Buenos Aires-based research firm Econviews. “Today it’s a restriction, but if a province is able to line up the money, the government should want to approve it.”

Buenos Aires province’s budget authorizes it to sell up to 3.2 billion pesos of debt this year. The province faces a projected budget deficit of 5.5 billion pesos, Felisa Stangatti, a spokeswoman for the provincial Finance Ministry, said last week.

Bond Yields

Argentine federal government bonds have rallied this year as concern that the government may default for a second time this decade eased, helping the provinces access credit markets. The extra yield investors demand to own Argentina’s dollar bonds instead of U.S. Treasuries fell to 9.16 percentage points today, its lowest since September, from 19.65 points on Nov. 14, according to JPMorgan Chase & Co.

While the yield gap has narrowed, it remains more than three times wider than neighboring Brazil’s 2.48 percentage point spread. Argentina also faces lawsuits from creditors who held out of a 2005 restructuring -- a legal obstacle that’s preventing the country from selling debt in international markets.

“It’s a difficult market because if the nation doesn’t have access to credit, it’s normally harder for the provinces,” said Kiguel. “The provinces are going to try to find financing because they need the money.”

A bond sale could be easier for oil-producing provinces, such as Chubut, Neuquen or Salta, which can use royalties to guarantee their notes, he said.

Markets Last Week

Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 fell 67 basis points to 14.90 percent, according to JPMorgan Chase & Co. The peso weakened 0.1 percent to 3.8079 per U.S. dollar from 3.8045 on July 17.

The Merval stock index advanced 3.2 percent to 1,675.10. Petrobras Energia Participaciones SA, the Argentine unit of Brazil’s state-controlled oil company, rose 5.7 percent for the biggest gain in the index.

The following is a list of events in Argentina this week:

Event Date Shopping Center Sales July 28 Supermarket Sales July 29 Construction July 31

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net

Last Updated: July 27, 2009 17:21 EDT