(Adds credit rating downgrade and comments from Fitch)
By Sarah Marsh and Daniel Bases
BUENOS AIRES/NEW YORK, Oct 31 (Reuters) - Argentina's debt default spread to its Par bonds on Friday after the country failed to complete an interest payment, raising the risk that creditors could demand that the country's cash-strapped government immediately repay all of its debt.
Argentina deposited a $161 million payment with a newly appointed local trustee last month to try to circumvent U.S. court orders for it to settle with "holdout" investors. The holdouts are suing to get full repayment of bonds from a 2002 default before holders that accepted the terms of a debt restructuring get paid by the government.
But Par bondholders could not collect the $161 million payment due to legal and technical hurdles, and the 30-day grace period since the coupon was originally due expired at midnight Thursday.
Argentina's economy ministry has not said whether any bondholders have come forward to collect.
Argentina had already defaulted in July on its discount notes, but holders of the Par bonds might be more likely to claim accelerated payment of the principal because the Par bonds are trading at a steeper discount to their original value.
Demands for accelerated payment could leave Argentina facing claims of up to $30 billion, more than it holds in foreign reserves.
Fitch Ratings weighed in on Friday by cutting Argentina's foreign law Par bonds to the rock bottom level of "D", for Default.
"The only exchanged foreign currency bond under foreign law that remains performing is the Global17 bond, which has a coupon payment scheduled for Dec. 2," the credit ratings agency said in a statement.
Sources owning Argentine debt say other creditors have approached them about forming a group to accelerate payment. The move would require the backing of investors holding at least 25 percent of the nominal amount of any single bond series.
"We were asked in very theoretical terms what our thoughts were on acceleration," said one source. "It was something intermediated by an investment bank. The shop leading the offer did not want to be identified."
Analysts say many investors will be hesitant about such a move as it could mean costly litigation with an uncertain outcome. It could also trigger a balance of payments crisis and further damage Argentina's ailing economy, making an eventual payment even more difficult.
Those talking of acceleration may simply be sounding out options or putting pressure on Argentina to reach a deal with the holdout funds that rejected restructuring following its 2002 default and are seeking full repayment of their bonds.
Argentine cabinet chief Jorge Capitanich said on Thursday that instead of accelerating, those bondholders who accepted steep writedowns in 2005 and 2010 debt swaps should sue U.S. District Judge Griesa for blocking interest payments.
"The person violating the law is the judge and not Argentina, which is fulfilling its obligations to pay its sovereign debt," he told reporters.
Some creditors fear acceleration would simply prevent a solution to the dispute with the holdouts, which would unblock interest payments.
"We are keeping our options open and not siding with anyone in an acceleration effort," said one investor who requested anonymity. "Our interest is not to be an obstacle to a deal that can settle this all after Jan. 1."
Argentina says it cannot reach a deal with holdouts until the year-end expiration of the so-called RUFO clause, which prevents it from paying them better terms than those taken by bondholders who accepted writedowns in 2005 and 2010.
"I have heard from a number of Par holders that they will consider what their next move will be after the expiration of RUFO next year," said a source at a fund holding Argentine debt.
The default will meanwhile continue to be a drag on the economy, Fitch said.
"Economic conditions have deteriorated significantly in 2014, with GDP expected to post a 1.9 percent contraction this year," said Fitch analyst Santiago Mosquera.
"We anticipate the economy will contract even further, by 2.6 percent in 2015, if Argentina fails to clear the default before presidential elections are held in October next year," Mosquera added. (Additional reporting by Davide Scigliuzzo with IFR in New York and Hugh Bronstein and Hernan Nessi in Buenos Aires; Editing by Kieran Murray,; Lisa Von Ahn and Peter Galloway)