(Adds government defense of primary surplus, economic health)

BUENOS AIRES, Aug 8 (Reuters) - Argentina’s government bond spreads, a gauge of investor aversion to risk, widened to their highest level since the country’s massive 2005 restructuring of defaulted debt, due to concerns over its financing outlook.

Argentina's spreads widened by more than 40 basis points to nearly 730 basis points over U.S. Treasuries in late trade on Friday, according to JP Morgan's Emerging Markets Bond Index Plus (EMBI+) 11EMJ.JPMEMBIPLUS.

Despite growth in Latin America’s No. 3 economy, its trade and fiscal surpluses, and high foreign reserves, the center-left government faces rising debt obligations in 2009 and prices for its top export earner -- soy -- have slumped.

Official numbers put inflation at about 9 percent, but private estimates say it is above 25 percent.

The administration of President Cristina Fernandez also has come under criticism by economists for selling debt to Venezuela at yields above 15 percent, adding to concerns.

“Why does a country that has trade and fiscal surpluses, is growing at Chinese rates and its principal export product (soy) is worth double what it was 10 years ago, have to go to Chavez to get into debt at 15 percent? There’s no doubt. We’re in trouble,” economist Carlos Melconian told newspaper Clarin.

Argentina confirmed in its official gazette on Friday the recent sale of 2015 dollar-denominated Bodens ARRO15D=RRBB to Venezuela, saying the government of President Hugo Chavez bought paper with a face value of $1.46 billion.

An Economy Ministry source said earlier this week Venezuela paid $1 billion for the bonds.

Argentina relies heavily on Venezuela for buying its debt because it remains largely shut out of international capital markets following its historic debt default in 2002.

The country completed a giant debt restructuring of $100 billion in defaulted bonds in 2005, but holders of about a quarter of that did not accept its swap offer and have sued Argentina in European and U.S. courts.

GLASS HALF-EMPTY?

The latest debt sale to Venezuela raised concern about Argentina’s ability to meet its financing needs next year.

Buenos Aires needs $6.1 billion in financing this year, according to the Economy Ministry. Next year -- a mid-term election year -- financing needs jump to $11.8 billion.

The ministry said late on Friday in a statement that the government had already covered its financing needs for this year and the primary budget surplus was on target to reach 3.5 percent of gross domestic product by the year’s end.

It also said economic growth, as measured by the EMAE economic activity index, was more than 6 percent in June year-on-year and more than 7 percent in July. The June EMAE figure will be released officially on Friday, Aug. 15.

Argentina’s primary budget surplus totaled 20.31 billion pesos in the first half of the year, but some critics say the national government is maintaining the surplus by freezing funds for the provinces.

Rumors of a possible downgrade in Argentina’s sovereign rating also helped depress bond prices.

“Amid speculation of an imminent rating downgrade there also were concerns about the negative impact of the recent pull back in agricultural commodity prices on the fiscal accounts and overall performance of the real economy,” Alberto Ramos of Goldman Sachs said in a research note.

On the local debt market, Argentine bonds <AR/BONOS> closed nearly 3 percent lower on average in over-the-counter trade. The jitters also hit the peso ARSB= and stocks .MERV.

Meanwhile, Argentina’s five-year credit default swaps, which protect investors against such things as defaults or credit restructurings, surged higher on Friday.

The cost to insure $10 million worth of Argentine debt rose by 69 basis points to roughly 885 basis points, according to the latest CDS prices from data provider Markit. That means investors are spending $885,000 annually over five years to insure their bonds, a rise of $69,000 in the last 24 hours. (Additional reporting by Daniel Bases in New York; Writing by Fiona Ortiz and Helen Popper; Editing by Theodore d’Afflisio and Braden Reddall)