By Hugh Bronstein and Cassandra Garrison
BUENOS AIRES (Reuters) - Argentina's battered bonds and currency were driven still lower on Friday amid downgrades by three credit rating agencies and a new measure the central bank said was designed to "avoid any lack of money" and safeguard the liquidity of the country's financial system.
Some private economists said the policy, which could limit the availability of hard peso currency to financial institutions, looked like a return to capital controls in Latin America's third-largest economy.
The central bank has burned through nearly $1 billion in reserves since Wednesday alone, in an effort to prop up the rickety peso.
"Financial entities must get prior authorization from the central bank to distribute their earnings," the central bank said in a statement.
In a follow-up statement, the bank said the measure was aimed at ensuring the liquidity of the financial system, so that depositors can withdraw money when needed.
"In times of greater uncertainty, we seek to increase the liquidity of the system to avoid any lack of money," it said.
Central bank spokesmen were not immediately available for further comment on the measure.
"It can be seen as a capital control because if you cannot take capital out of the country, that would be a measure of restriction," said Jose Dapena, director of the finance department for University of CEMA in Buenos Aires, referring to the new central bank policy.
U.S.-traded shares of financial services company Grupo Supervielle <SUPV.K> extended steep losses late in the New York session to fall 8.6% while Grupo Financiero Galicia <GGAL.O> closed 8.9% lower. Banco Macro <BMA> lost 6.3%.
The latest round of market tumult to plague Argentina started with the Aug. 11 primary election, in which business-friendly President Mauricio Macri got soundly thumped by center-left Peronist challenger Alberto Fernandez.
The general election, with Fernandez now the clear front-runner, is in late October.
"The central bank is not allowing them to distribute results, that means they cannot use their pesos. This is not a restriction of access to the FX market, but on the availability of pesos," a source familiar with the central bank plan told Reuters.
"The central bank wants banks to be very well capitalized right now," added the source, who requested anonymity because he was not authorized to speak to the media.
Standard & Poor's triggered automatic selling of Argentine bonds at big pension funds Thursday night when it slashed the country's long-term rating, saying a default was triggered by a government plan announced on Wednesday to extend the maturities of many bonds.
That resulted in an overnight 'D' rating on the short-term debt and a "selective default" for the long-term. S&P on Friday lifted the long-term rating to 'CCC-' and the short-term to 'C'.
Credit rating agency Fitch followed after market hours on Friday with a downgrade of Argentine debt to "Selective Default." Then came a downgrade from Moody's, citing the new central bank measure and heightened political uncertainty associated with a likely Fernandez victory in October.
Risk spreads blew out to levels not seen since 2005 while the local peso currency extended its year-to-date swoon to 36%.
Argentina's "Century Bond" maturing in 2117 <040114HQ6=> briefly traded at a record low below 38 cents on the dollar, according to MarketAxess, showing the kind of write-down markets are now bracing for.
The peso closed 2.72% weaker at 59.52 per dollar, extending losses so far this year to about 36%. Over the counter sovereign bonds fell an average 5.5% during the day, traders said.
Argentine spreads measuring risk of default versus safe-haven U.S. Treasury paper blew out 261 basis points to 2,533 on Friday, their highest since 2005, according to JP Morgan's Emerging Markets Bond Index Plus index.
CENTRAL BANK RESERVES
The central bank sold a total $387 million in reserves in four auctions Friday, aimed at stabilizing the peso. A fifth auction was abandoned due to lack of buyers, traders said.
It spent $367 million in interventions on Wednesday and $223 million on Thursday in its effort to defend the peso.
Investors in Argentina fear a return of the left to power could herald a new era of heavy government intervention in Latin America's third-largest economy. They also fear the plan to extend maturities will do little more than buy time and fail to prevent a more serious financial crisis further down the line.
"What triggered this week's mess was that local investors lost confidence in the government," said Roger Horn, executive director and senior emerging market strategist at SMBC Nikko Securities America in New York.
"People are selling what they can because they want to decrease exposure to Argentina. They've already taken losses, they don't see a way forward that is going to restore them, so they're cutting exposure," Horn said.
"It's a classic capitulation."
(Hugh Bronstein, Cassandra Garrison, Eliana Raszewski, Walter Bianchi, Gabriel Burin and Hernan Nessi in Buenos Aires; Rodrigo Campos in New York; Editing by David Gregorio and Tom Brown)