Argentina's government is ramping up state intervention in the economy to try to prevent a new debt default from triggering a balance of payments crisis but its policies are also battering business confidence and may deepen a recession.

In the six weeks since Argentina failed to complete a debt coupon payment and defaulted for the second time in 12 years, the government has restricted the amount of dollars available to importers, boosted subsidies and drawn up proposals to interfere in private companies' output plans.

"They're clamping down on foreign goods," said 42-year-old camping store salesman Javier Aguirre, gesturing at a single sleeping bag hung on a rack meant to display a dozen. "We are having to place things carefully at the front of the shelves to make it seem we're well stocked."

Along the Santa Fe shopping boulevard in Buenos Aires, the choke on imports and a sharp decline in consumer spending have driven up shop closures and forced retailers to bring forward sales.

The leftist government's measures are meant to shore up foreign reserves that stand at less than five months' worth of imports and boost consumer confidence to prevent the $490 billion economy already contracting.

But with no signs of a deal to emerge from default and thus no prospect of a return to global debt markets, capital flight has intensified, pushing the peso currency to record lows and fueling inflation.

One company manager who imports agricultural machinery, including water pumps and generators, describes the government's policies as "lethal" even before the default, and says they are now even worse.

He said the import curbs mean he been able to import goods worth just $2,795 in the first six months of the year compared with an average $25 million in previous years.

"We are eating up stock just to pay taxes," said the manager, who asked not to be identified because he was speaking out against the government. "We have merchandise for a few months, not more than a year, and after that the company will die."

Business leaders have long complained about President Cristina Fernandez's interventionist policies.

Heavy government spending and high commodity prices helped drive strong growth in the early years of her presidency but tight controls on prices and the currency market have caused imbalances in the economy and it fell into recession this year.

Foreign reserves have slumped and inflation is running at more than 30 percent.

"It was bad enough before, but with the default everything's worse," said Carolina Tiscornia, who works in a clothing store that is closing after revenues fell 30 percent this year.

IMPORT SQUEEZE

Argentina's reserves stand at eight-year lows of $28.4 billion and the central bank cannot keep tucking into its hard currency savings to defend the peso.

Exports are also falling more sharply than expected so the government risks having to drain its reserves perilously low to meet its energy imports bill and make good on its pledge to keep servicing performing debt.

Siobhan Morden, an economist at Jefferies, forecasts that Argentina will owe about $14 billion in debt payments next year and that reserves could drop as low as $7 billion by the end of 2015.

That has left policymakers few options beyond fighting to protect the trade surplus, their primary source of dollars, so the central bank has restricted further the dollars available to importers.

Reuters could not independently verify the numbers but businesses say the restrictions are harsher for industries where imports are considered non-essential or where the government wants to promote domestic production, including agricultural machinery and auto parts.

Adding to their woes, importers complain the debt default and the weak economy have undermined the confidence of suppliers in the ability of Argentine firms to pay their bills.

Importers have seen deadlines to repay credit lines shrink to an average of 30 days from 110 days before the default on July 30, said Miguel Ponce, spokesman for the Argentine Chamber of Importers.

'ASPHYXIATING INTERVENTIONISM'

Exports are down 10 percent this year as key trade partner Brazil tipped into recession and global prices for soy, corn and wheat fell to their lowest levels since 2010.

Industrial output has been in decline for 12 months.

Fiat's Argentine subsidiary cut production and put 3,000 workers on rotating leave because of slack demand and difficulties importing components, local media reported earlier this month. Fiat was not reachable for comment.

Other car makers have also slowed production, sparking a showdown between the auto industry and tough-talking Fernandez, who accuses them of holding stock back because of inflation.

In an attempt to keep production lines running and stem job losses, the government is threatening to intervene in the production decisions of large companies while also boosting subsidies to some industries in a bid to spur growth.

The so-called "Supply Law," which is passing smoothly through Congress, would allow the government to cap prices, set profit margins and determine production levels.

The proposal has alarmed big business. Last week, leaders from the agricultural, banking, industry and retail sectors joined forces to threaten legal action against the bill.

"We urge the legislative power to take into account the risks this initiative implies for job creation, investment, output growth and adequate supply," the group said.

Rodolfo Rossi, a former central banker and staunch Fernandez critic, told Reuters the package of measures implemented since the default amounted to "asphyxiating state interventionism."

ANOTHER DEVALUATION?

David Rees at London-based Capital Economics said he expects the Argentina economy to shrink 2-3 percent this year and "there is a growing risk that the recession will spill over into 2015."

Private economists say the printing of money to finance government spending is also stoking inflation, adding pressure to the ailing peso.

The deteriorating economic outlook is pushing Argentines to seek refuge in dollars and the margin between the official exchange rate and black market rate has widened to 70 percent from 44 percent pre-default.

The black market "blue peso" traded at 14.25 per dollar on Thursday, down around 30 percent so far this year.

To take pressure of the peso, the central bank last week raised the minimum monthly salary required for Argentines to buy dollars and reduced the amount of hard currency commercial banks can hold.

Neither will halt the peso's fall for long and a new devaluation is widely expected, adding to inflationary pressures.

"My wages went up 18 percent last year while inflation was around 25 percent ... This year will likely be worse," said one state school maths teacher who gave his name as Miguel. He said he now buys the cheapest food brands but still struggles to pay his bills.

Supermarket sales have fallen for seven straight months, including a 4 percent slide in June, and many smaller stores have been hit even harder.

"Our revenue is down 20 percent from last year," said Daniela Sisca, the owner of a cake shop in the affluent Recoleta neighborhood. "You notice people buying less especially at the end of the month."