BUENOS AIRES, Nov 7 (Reuters) - Argentina's provinces are taking advantage of a sharp drop in interest rates to issue more debt, allowing them to finance election year spending but raising concerns about longer-term solvency as fiscal deficits grow.
Both national and provincial debt has grown since President Mauricio Macri's center-right administration ended a decade-long legal dispute with creditors earlier this year, paving the way for Argentina's return to international sovereign debt markets in April 2016.
One-third of Argentina's provinces have sold debt this year, and many more are thought to be planning debt issues in 2017. Many provinces, particularly poorer ones, depend on federal funds to balance their budgets as part of a complex "co-participation" regime.
While provinces' debt loads are still relatively low, growth in fiscal deficits - spurred, in part, by an expected increase in government spending ahead of next year's midterm elections - could raise doubts about provinces' solvency.
"I'm not scared about provinces taking on debt after years of being blocked from the international market, but this should be accompanied by a reduction in the fiscal deficit," said Gustavo Neffa, a partner at consultancy Research for Traders.
Interest rates for Argentine bonds fell to between 6.5 percent and 8 percent, down from about 15 percent after the dispute with so-called "holdout" creditors, who refused to accept the terms of an earlier debt restructuring after the country's 2002 default, came to an end.
Together, Argentina's 23 provinces and the autonomous Buenos Aires city are expected to issue $7.9 billion in new bonds in 2016, according to Research for Traders. The total provincial deficit is expected to rise to 1.5 percent of GDP in 2017, up from 1 percent in 2016 and 0.6 percent in 2015.
"The availability of funds will shrink and interest rates will rise due to growing concerns related to solvency," said Matias Carugati, an economist with Buenos Aires-based consultancy Management & Fit.
Buenos Aires, the largest province, has sold $3 billion in debt in 2016, a portion of which will be used to fund this year's projected $1.6 billion deficit. The province's 2017 budget allows for up to $3.3 billion in debt.
"Due to the high tax burden and the rigidity of local public spending, many provincial governments' fiscal options are limited, at least in the short term, to obtaining new financing in the markets," Walter Agosto, researcher at Buenos Aires think tank CIPPEC, wrote in a note. (Reporting by Eliana Raszewski; Writing by Luc Cohen; editing by Grant McCool)