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selling@ (Updates bond spread data, adds over the counter bond activity)
BUENOS AIRES/LONDON/NEW YORK, Aug 30 (Reuters) - Argentina's battered bonds were driven still lower on Friday after a credit rating cut from Standard & Poor's triggered automatic selling mechanisms at big pension funds.
Risk spreads blew out to levels not seen since 2005 while the local peso currency extended its year-to-date swoon to 36%, forcing renewed central bank market intervention and intensifying worries about Argentina's ability to honor its dollar-denominated debt.
S&P effectively 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.
As expected, S&P on Friday lifted the long-term rating to 'CCC-' and the short-term to 'C'.
"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.
"A CCC rating is actually more meaningful than a default (rating)," Aberdeen Standard's head of emerging market sovereign debt Edwin Gutierrez said.
"German pension funds can't hold CCC so that is actually the bigger trigger for selling," he said, adding that its rules weren't as strict on default-stricken bonds.
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.
Friday's selling extended the rout in Argentina's markets since business-friendly President Mauricio Macri was thumped by populist-leaning Peronist Alberto Fernandez in the Aug. 11 primary election. The general election, with Fernandez now the clear front-runner, is in late October.
Argentine spreads measuring risk of default versus safe-haven U.S. Treasury paper blew out 264 basis points to 2,536 on Friday, their highest since 2005, according to JP Morgan's Emerging Markets Bond Index Plus index.
A spokesman for the International Monetary Fund, meanwhile, said its executive board was to meet informally on Friday to discuss Argentina. Debt owed by Argentina to the fund under a $57 billion standby financing deal is also up for "re-profiling" under the government's plan.
BURNING THROUGH RESERVES
The central bank sold a total $387 million in reserves in four auctions during the day, 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."
(Reporting by Marc Jones in London; Hugh Bronstein, Walter Bianchi, Gabriel Burin and Hernan Nessi in Buenos Aires; Rodrigo Campos in New York; Editing by David Gregorio and Tom Brown)