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* Government announced 10 pct farmer price increase
* Small, domestic exporters seek more financing from banks
* Banks wary of what they consider high risk
By Ange Aboa
ABIDJAN, Oct 4 (Reuters) - Banks in Ivory Coast are reluctant to boost credit lines to local cocoa exporters struggling to cover extra costs brought on by a surprise hike in the farmgate price, exporters and bankers said on Tuesday, raising the prospect of contract defaults.
The government increased the guaranteed minimum price for farmers by 10 percent to 1,100 CFA francs ($1.88) at the start of the 2016/17 season last week, rejecting a recommendation from the Coffee and Cocoa Council (CCC) to keep the price unchanged.
Under the top producer's forward sales system, exporters bid for the right to export certain bean volumes during specific time periods. However, they are then responsible for purchasing physical cocoa at the government-mandated price, and as they are only paid on delivery, domestic exporters need credit to fulfil their contracts.
Many exporters, particularly smaller domestic operators, were caught off guard by the price hike, which entailed a corresponding increase in the price exporters pay for beans at the ports of Abidjan and San Pedro.
"The financing that we have won't permit us to buy the volumes that we have purchased from the CCC because the farmgate price is high and surprised us," said the financial director at one small exporter.
"So we're in discussions for an increase (in financing)," said the exporter, who asked not to be named.
While major international exporters have their own internal financing structures, smaller local operators typically rely on credit lines from banks in Ivory Coast.
If they cannot raise the funds to cover the additional cost of buying beans at the new price, some will be unable to buy enough cocoa to fulfil their obligations to counterparties and, therefore, default on contracts, exporters said.
"Currently, all of our clients want an increase of 10 to 12 percent from their initial financing requirements because of the price increases, but it will be complicated to satisfy everyone," said a banker with the local unit of BNP Paribas .
Prolonged dry weather earlier this year is projected to lead to a slow start to Ivory Coast's October-to-March main crop harvest, creating greater competition between exporters for available beans.
Bankers said they were not confident that small domestic exporters will be able to fill orders and pay back their loans. Any increased financing that is agreed will also come with higher interest rates, they said.
"We have already taken a big risk financing them and we do not want to expose ourselves too much because they are only buying small volumes," said a banker with Societe Generale , one of the main lenders in the industry.
"The risk (of default) is higher," he added.
$1 = 585.1000 CFA francs Editing by Joe Bavier and David Evans