Argentina: Argentine Devaluation and Exchange Control Restrictions; Impact on Payments Abroad

This article responds to an inquiry on recent Argentine legislation. Specifically, we address recent regulations concerning devaluation of local currency and exchange controls, as they affect (i) the payment of claims and premiums for U.S. dollar-denominated insurance policies and (ii) the remittance of U.S. dollars abroad by Argentine insurers to pay reinsurance premiums.

On January 7, 2002, the Argentine Congress enacted Law No. 25,561 (Ley de Emergencia Económica, the Emergency Economic Act or "EEA"), which is effective as from January 6, 2002. Section 11 of the EEA authorizes the payment of all dollar-denominated obligations referenced in contracts between private parties in pesos at the prior exchange rate of Ps. 1 = U.S.$1. This exchange rate shall prevail for up to 180 days, during which time the parties shall renegotiate the terms of their agreement. While the EEA does not refer to specific types of agreements, the measure is intended to apply generally and, absent a subsequent, express exception, insurance contracts fall within the ambit of the EEA The text of the EEA can be found at http://infoleg.mecon.gov.ar/txtnorma/71477.htm.

The EEA allows the parties to continue to express their obligations, including the payment of insurance premiums, in U.S. dollars or in pesos, though the statute prohibits the parties from indexing or restating payment obligations as a mean to offset exchange rate fluctuations (See EEA, Section 7). This prohibition hinders the ability of parties to hedge against the future devaluation risk of the peso.

Our discussions with clients and colleagues, have confirmed that local insurers, confronted with the forced acceptance of pesos at a rate that does not reflect actual market rates, stopped issuing annual policies and are issuing monthly policies instead. This practice allows insurers to limit their inflation risk to a monthly basis, and avoid the need to negotiate a highly uncertain future on an annual basis.

Nonetheless, unless the insurer has a monthly policy already approved by the Federal Insurance Commission (Superintendencia de Seguros de la Nación), she must seek the regulatory approval of the Federal Insurance Commission (Superintendencia de Seguros de la Nación).

The approval of a new policy is a long and bureaucratic process. However, insurers can file a petition before the Commission to "join" an already existing monthly policy (that is a monthly policy already approved to other insurance company). Once the filing is made, the Commission has a 90-day period to issue the resolution granting approval. Further information may be obtained at the Federal Insurance Commission’s website www.ssn.gov.ar.

Though no clear pronouncement has emerged, insurers are currently taking the position that their payment of U.S. dollar claims follows the same rules applicable to insurance contracts generally. As a result, insurers are paying claims in pesos at the one-to-one exchange rate. Because this practice leads to claims that insurers are being unjustly enriched by having received U.S. dollar premiums while paying claims in devalued pesos, we anticipate that this issue will soon come under judicial scrutiny.

Decree 1570/01, as modified, implements the infamous "corralito" that currently restricts the withdrawal of deposits in the Argentine banking system. Such restrictions include a blanket prohibition on the transfer of deposits outside the system (See Section 2 of Decree 1570/01). Parties seeking an exception to the prohibition must seek Central Bank approval to "export" (i.e. transfer abroad) money and other liquid assets. As with all parties desiring to cancel obligations abroad, insurers desiring to remit payment must obtain this approval. Decree 1570/01 and its modifications can be found at http://infoleg.mecon.gov.ar.

Though highly bureaucratic, the procedure is in effect and parties are obtaining Central Bank approval. Among other things, approval is conditioned on the applicant’s ability to provide a no pending claim or assessment letter from the federal tax authority.

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