Oct. 26 (Bloomberg) -- Buenos Aires province is counting on Argentine lawmakers to lift restrictions on provincial government bond sales as it seeks to offer 1.2 billion pesos ($314.1 million) in debt by the end of the year.

The province plans to sell the bonds, half of them directly to local banks, should Argentina suspend the so-called fiscal responsibility law that was imposed after swelling local deficits contributed to the nation’s $95 billion debt default in 2001, said Felisa Stangatti, a spokeswoman for the Buenos Aires provincial Finance Ministry. Senators will vote as soon as this week on a bill that removes the limits for two years.

Buenos Aires, the biggest province by economic production, joins Cordoba, the third-largest, among local governments planning a bond sale as deficits more than double. The country’s offer to restructure $20 billion of defaulted bonds helps clear the way for an international issue of sovereign and province debt, said Alberto Bernal, head of emerging-markets research at Bulltick Securities Corp. in Miami.

“If there is an additional spread, and liquidity in the market remains ample, there will be demand” for local government bonds, Bernal said in a telephone interview after a visit to Buenos Aires last week. “The sovereign comes first, then the provinces and private companies.”

The yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 rose three basis points, or 0.03 percentage point, to 11.56 percent at 4:57 p.m. New York time, according to Bloomberg composite prices.

Widening Deficits

The total deficit of Argentina’s 23 provinces and the city of Buenos Aires may jump to 8.1 billion pesos 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 nine of the local governments will have a budget gap, the firm’s data show.

The lower house already has approved the suspension of Argentina’s fiscal responsibility law. The rules prohibit provinces from budgeting deficits and selling debt to pay expenses, while spending isn’t permitted to grow at a faster rate than gross domestic product.

Buenos Aires needs to cover spending with this year’s local bond sale, according to Stangatti. The governor’s proposed budget for 2010 calls for an authorization of up to 10.7 billion pesos of debt sales next year, she said, declining to say if there were plans for an international issue.

Sovereign Debt Sale

Argentina has been locked out of international debt markets since 2001 as it fights lawsuits stemming from the default. It re-opened an offer last week to swap $20 billion of bonds held out of a 2005 restructuring, paving a way to regain access to overseas markets.

Unless Argentina returns to international bond markets, provinces would have to pay about 16 percent, or two to three basis points above the central bank’s Badlar interbank rate, to borrow, said Veronica Sosa, an analyst with Economia & Regiones. A basis point equals 0.01 percentage point.

Unfavorable yields forced Cordoba to delay plans this year to sell $150 million worth of 12 percent dollar-linked bonds due in 2017, said Patricio Esnaola, a Buenos Aires-based analyst who rates local governments for Moody’s Investors Service. Moody’s in July assigned the delayed Cordoba bond a B3 rating.

Cordoba obtained approval last year from the federal government, another requirement of the fiscal responsibility law, to sell the bonds at a rate not to exceed 12 percent. The market was no longer willing to accept that level by the time the province offered the notes in July, Esnaola said.

“Right now they are waiting for market conditions to improve,” he said.

Markets Last Week

The yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 was unchanged last week at 11.53 percent. The peso was little changed at 3.8208 per U.S. dollar from 3.8192 on Oct. 16.

The Merval stock index increased 4 percent to 2,295.88. IRSA Inversiones y Representaciones SA, a real estate investor, led the gain, climbing 15 percent to 3.57 pesos. Petrobras Energia SA, the Argentine unit of Brazil’s state-controlled oil company, fell the most, losing 3.1 percent to 6.9 pesos.

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

Event                                   Date
Shopping Center Sales                   Oct. 27
Supermarket Sales                       Oct. 28
Construction                            Oct. 30

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

Last Updated: October 26, 2009 17:05 EDT