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Santa Cruz province in southern Argentina has major oil and natural gas reserves, promising deposits of gold and silver and a population of barely one person per kilometer. Yet it lives on the verge of bankruptcy.
Last month, the local legislature tried to pass an austerity plan that included pension cuts and lay-offs among state employees. The initiative failed when hundreds of angry protesters swarmed the building.
Many provinces in Latin America's No. 3 economy are under pressure as public spending grows faster than revenues.
Provincial governments spend most of their resources on salaries, which have risen sharply since 2007, when Argentine inflation began climbing to among the world's highest rates.
It is an explosive cocktail that is undermining local governments' ability to pay wages, could trigger unrest and eventually threaten mining and energy investments.
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"In the last three or four months, the number of roadblocks by protesters has shot upward in some provinces," said political analyst Patricio Giusto at the Political Diagnosis consultancy.
Last year, teachers in Santa Cruz, where President Cristina Fernandez began her political career, blocked access to oil facilities to demand pay hikes. The province, which produces 20 percent of Argentina's oil, had to stop pumping crude for weeks.
Oilfield services companies Schlumberger (SLB.N) and Halliburton (HAL.N) in September said they would leave Santa Cruz due to high social tensions, according to local newspaper La Nacion. They only changed their minds after talks with the federal government.
Argentina's current financial problems are much less severe than those the country faced during its 2001/02 economic crisis, when out-of-control debt levels forced some provincial governments to issue their own currencies to pay employees.
Argentina has risen from the ashes of its sovereign debt default and a punishing currency devaluation in 2002, growing at rapid rates in most of the last nine years. But provincial public spending is getting out of hand, mainly due to the inflation that has accompanied such high economic growth.
The state is the biggest employer in many Argentine provinces, giving policymakers little room to reduce costs without imposing politically painful cuts.
"About 88 to 90 percent of our outlays are (...) enormously rigid. They can't be changed easily even if you have the political will because this would lead to social conflicts and economic problems," Santa Fe province's economy chief, Angel Jose Sciara, told Reuters.
Santa Fe, a major agricultural producer with a reputation for being one of Argentina's best-run regions, was recently forced to defer wage payments for two days due to cash flow problems. Many governors say they cannot keep granting state workers high wage increases, which in 2011 exceeded 30 percent.
Wage hikes often track private sector inflation estimates, which range between 20 percent and 25 percent for 2011.
