* Global market uncertainty weighing on debt swap prospects
* Central bank reserves seen as alternative financing source
By Walter Bianchi and Walter Brandimarte
BUENOS AIRES, Feb 4 (Reuters) - Argentina's long-planned swap of defaulted debt could fail if global market conditions continue to worsen, forcing the government to dig deeper into other sources of financing such as central bank reserves.
President Cristina Fernandez, facing constraints to finance spiraling government spending, agreed in 2008 to reopen a swap deal to holders of some $20 billion in defaulted bonds who rejected a massive debt restructuring in 2005.
The swap plan, which could clear the way for Argentina to issue bonds overseas for the first time since its 2002 default, was delayed by the global markets meltdown of late 2008 only to be revived again in September last year.
Now renewed market turmoil is putting the deal at risk yet again, local analysts say.
"We don't know what's going to happen to this swap because of the situation of international markets," said Guido Bizzozero, an analyst with the Allaria Ledesma brokerage in Buenos Aires.
Fernandez could abort the swap if it becomes clear that Argentina would not be able to issue bonds at single-, or even low double-digit interest rates, analysts say.
Accepting much higher rates than those paid by neighboring Brazil or Uruguay could further hurt Fernandez's approval ratings, which are languishing at about 20 percent, before next year's presidential elections, a poll showed late last year.
"If the swap doesn't make it easier for Argentina to issue debt overseas or domestically in order to finance the government's growing expenditure, one can ask why we should pay the holdouts," prominent economist Miguel Broda said in an interview with a local radio station.
He was referring to the bondholders who rejected the steep discount in the 2005 restructuring to hold out for a better deal. Many filed lawsuits to force Argentina to pay them the full value of their bonds. Unless Argentina can neutralize the lawsuits with a successful swap it cannot return to international debt markets.
"If the cost for Argentina to issue debt stands at 14 percent or 15 percent, and is viewed as excessive, the swap could be suspended," he added.
Argentina's cost of issuing debt abroad would be the fourth highest among the 15 emerging countries tracked by the benchmark JP Morgan EMBI+ index <11EMJ> -- after Venezuela, Ecuador and Ukraine.
A high rating of investor acceptance in the swap operation could arguably lower that cost, but not much if global markets continue to deteriorate.
Argentina's yield spreads over U.S. Treasuries widened more than 40 basis points on Thursday -- the second largest jump measured by the EMBI+ -- to above 790 basis points, its widest in nearly two months.
"If Argentina's risk spreads don't fall below 660 points, the swap will be difficult," said former Central Bank president Rodolfo Rossi.
RAIDING CENTRAL BANK RESERVES
Fernandez's insistence on tapping Central Bank reserves to pay debt coming due this year is a sign that the government is already preparing alternative strategies to finance an expected 30 percent increase in government spending this year.
After firing Central Bank chief Martin Redrado, who had opposed her plan to use part of the reserves to create a $6.6 billion fund, Fernandez nominated on Wednesday a close ally, Mercedes Marco del Pont, to head the monetary authority.
"The Argentina Central Bank's independence, however undermined during Mr. Redrado's term, is likely to be wiped out going forward," RBS Securities economist Boris Segura said in a research note, adding that he expects the government to implement the reserves fund as soon as possible.
Tapping central bank reserves and profits is likely going to be Argentina's most important financing strategy since the nationalization of the country's social security administration late in 2008.
Fernandez will need congressional support to move forward with the reserves plan, but analysts say cash-strapped provincial governors may back the idea if she promised them part of the funds. (Editing by Fiona Ortiz; Editing by James Dalgleish)