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.

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.


This year, the gap between expenditures and revenues threatens to widen even more as tax receipts get hit by fallout from Europe's debt crisis and slower demand from neighboring Brazil and key commodities client China.

Most of the tax revenue that goes to provincial governments is collected by Argentina's federal government and distributed to provincial authorities under a complex tax-sharing scheme.

Last December, these transfers slowed to their lowest rate in two years. Analysts say provincial dependence on these resources is a major vulnerability.

With few exceptions, the degree of fiscal autonomy is medium or low, said Guillermo Giussi, analyst at the Economia y Regiones consultancy.

The provinces account for nearly 45 percent of all expenditures made by Argentina's public sector, but they receive 26 percent of the resources collected by the nation, he said.

Last year, the country's 24 provinces had a consolidated primary fiscal deficit of around 21.1 billion pesos ($4.9 billion), or 0.3 percent of gross domestic product, according to the IERAL institute of economic studies.

That is low compared with most European countries, but the rate could more than triple in 2012.

The provinces either slow spending ... or they may end the year with more debt and perhaps even with delays in paying salaries, said Marcelo Capello, chief economist at IERAL.

After expanding by roughly 9 percent in 2011, Argentina's economy could grow about 4 percent in 2012 while inflation stays above 20 percent, private economists estimate.


The provinces say they have little extra fat to cut.

We have teachers where we need teachers, and in fact we may need even more. The last thing we can do is cut teachers, said Silvina Batakis, economy minister in Buenos Aires province.

Buenos Aires, which is about the size of Italy, accounts for almost 40 percent of national GDP and most of the country's provincial deficit as well.

Provincial funding sources are limited and most districts have had to seek assistance from the national government to cover their financing needs.

Larger ones such as Buenos Aires, Cordoba and Santa Fe have access to the local debt market. They have also tapped global markets a handful of times but they have had to pay yields above 10 percent.

The federal government has not returned to international credit markets since its massive debt default, relying instead of loans within the public sector and using central bank reserves to repay private creditors.

Argentina's government, the biggest lender to provinces, restructured local debts worth about $16.6 billion in May 2010. And in December, President Fernandez extended a grace period on payments for another two years to give provinces breathing room.

The scenario has improved since 2001, when the provinces' debt stock represented 100 percent of local revenue versus 44.4 percent today.

But protests sparked by spending cuts could have a broader economic impact.

In one of the most sensitive sectors, the energy sector, some companies in Chubut province and Santa Cruz have already begun to waver on their investment plans for 2012 and 2013 due to social conflicts, Giusto said.