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 policy that the central bank said would ensure 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.
"Financial entities must get prior authorization from the central bank to distribute their results," the central bank said in a statement.
In a follow-up statement, the bank said the measure was aimed at ensuring that the liquidity of the financial system is maintained, 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.
The latest round of 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 to CCC-, 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. Then, as expected, 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%.
"We are seeing some forced sellers," said Jim Barrineau, co-head of emerging market debt at Schroder Investment Management in New York.
"Some investors, depending on their prospectus, may be required to sell. Bonds are now trading in the high 30s. I think it is excessive but liquidity is poor and if you are forced to sell you really have to take what the market offers," he said.
Argentina's "Century Bond" maturing in 2117 traded at a record low below 39 cents on the dollar, 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.
(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)