(Corrects paragraph five to say that reserves dropped to $27.5 billion, instead of dropped (by) $27.5 billion)
March 17 (Reuters) - Moody's Investors Service cut Argentina's government bond rating further into junk on Monday, saying a sharp drop in the country's reserves raised a red flag on foreign-currency debt service obligations.
The rating agency cut the credit rating to Caa1 from B3 and changed the outlook to stable from negative.
A major driver behind the rating cut came from the falling reserves, on which the cash-strapped country heavily relies.
Moody's analyst Gabriel Torres called the reserves drop a "semi-freefall."
Reserves have dropped to $27.5 billion from a high of $52.7 billion in 2011, according to Moody's.
"What we're going to be looking at more than anything now is reserves," Torres said.
"If Argentina enhances its funding options, whatever that may be - from tapping markets, to greater bilateral lending, to greater capital inflows, to whatever the options are that make it easier for them - then those are all credit positive actions," he said.
But Argentina has been shut out of capital markets for more than a decade since its default.
"Argentina could for example access IMF funding, but they would have to have a completely different relationship with the IMF than they have today," Torres said. (Reporting By Kanika Sikka in Bangalore and Luciana Lopez in New York; Editing by Diane Craft)