Argentina: Restructuring U.S. Dollar Obligations; Central Bank Approvals of Foreign Currency Transfers

Co-written by Federico Busso & Javier Podrez Yaniz

On January __,6, 2002, the Argentine Congress enacted the Ley de Emergencia Pública y Régimen Cambiario, Law No. 25,561 (the Public Emergency and Currency Regime Act or the "Act") to remove Argentina from nearly 11 years of a one-to-one currency peg to the U.S. dollar. To ameliorate the effects of the currency devaluation on existing U.S. dollar-denominated obligations, the Act permanently converts certain consumer loans, including consumer home loans under U.S.$100,000, to pesos. For all other private obligations, the conversion is transitory, and payments are made "on account" of a final sum that is to be renegotiated by the parties within 180 days. (See Section 11 of the Act.) If the parties fail to reach agreement on the restructuring of the obligations, the dispute will be referred to mediation and, failing resolution, to the courts. The full text of the Public Emergency Act can be found at [www.mecon.gov.ar/??].http://infoleg.mecon.gov.ar.

What's happening in the real world? We are advising clients on the creditor side to accept pesos on the one-to-one conversion rate in compliance with the Act. Nonetheless, for credits only temporarily converted to pesos, the cancellation of dollar-denominated obligations in pesos is being booked at a "tentative", one-to-one exchange rate, and the creditors have included a "reference" to clarify that the payments are received "on account" of the obligation at this tentative rate. As a result, we hope to help creditors recoup some or all of the loss caused by the devalued peso when the obligations are definitively restructured within the 180-day period.

While undoing many rules of the former currency regime, the Act does not modify the Civil Code provisions allowing parties to express their payment obligations in dollars. The ability to continue to use the dollar allows the creditor to avoid the devaluation risk, especially given the Act’s prohibition of indexing peso-denominated obligations to changes relative to the dollar. Unfortunately, the continued ability to state obligations in dollars does not resolve the practical problems of obtaining dollars made difficult by the recent restrictions on withdrawals and currency exchange (see discussion of the corralito below).

Under current rules, parties can obtain dollars legally only by delivery of pesos in cash and, as of January 15, checks to authorized banks and currency exchange firms. Since theThe rules limit cash withdrawals to $1,200 to $1,500 per month, and checks, while not limited in amount, are subject to a significant commercial discount. As a result, few parties find themselves with enough cash to obtain dollars sufficient to servicepesos to sustain a dollar-denominated credit. Current credit.

rules do not permit the deposit of U.S. dollarchecks, effectively foreclosing payment of obligations in that way. Even for those fortunate to haveU.S. dollar cash reserves, legislation enacted during the prior administration prohibits cash transactions for amounts above one thousand pesos. All non-cash transfers, be they checks,Payment by U.S. bank deposits, credit card advances, and other transfers, fall within the perimeter of the corralito.

At this juncture and pending a relaxing of the rules on withdrawal and exchange, we recommend that creditors document their transactions in dollars. In response to the exchange and payment restrictions (among which are transfers discussed below), we suggest fixing an exchange rate to pesos determined by reference to the Mercado Libre de Cambios (spot market rate) recognized by Communication "A" 3425 of the Central Bank.

In December 2001, the executive branch foreshadowed the undoing of prior Argentine monetary policy by issuing Decree 1570/01, which, among other things, imposed rigid restrictions on currency withdrawals known locally as the "corralito". The corralito, introduced as a revenue measure, aimed to eliminate the cash-based, black market economy and enlarge the tax base. Decree 1606/01, issued after the passage of the Act, modified certain provisions of the corralito, in the meantime making clear that its purpose had shifted toward avoiding a run on the banking system.

Under the new rules,all currency transfers abroad must be approved by the Argentine Central Bank. These restrictions apply to all transfers by Argentine entities to pay financial creditors located abroad. While requests for Central Bank approval have been numerous, actual approvals have been few and, in all cases, limited to import-export transactions. Indeed, the Central Bank has yet to approve any requests for transfers to meet payment obligations to financial creditors, including banks and other creditors holding obligations.

Look for further executive decrees and Central Bank dispositions to relax the approval standards to enable approval for bona fide requests to pay financial creditors abroad.

dollar check is no longer viable, as the new rules no longer permit the deposit of U.S. dollar checks in the Argentine banking system. All other non-cash transfers in dollars, be they bank deposits, credit card advances, or other means, fall within the perimeter of the corralito.

At this juncture and pending a relaxing of the rules on withdrawal and exchange, we recommend that creditors document their transactions in dollars. In response to the exchange and payment restrictions (among which are transfers discussed below), we suggest fixing an exchange rate to pesos determined by reference to the Mercado Libre de Cambios (spot market rate) recognized by Communication "A" 3425 of the Central Bank.

In December 2001, the executive branch foreshadowed the undoing of prior Argentine monetary policy by issuing Decree 1570/01, which, among other things, imposed rigid restrictions on currency withdrawals known locally as the "corralito". The corralito, introduced as a revenue measure, aimed to eliminate the cash-based, black market economy and enlarge the tax base. Decree 1606/01, issued after the passage of the Act, modified certain provisions of the corralito, in the meantime making clear that its purpose had shifted toward avoiding a run on the banking system.

Under the new rules, arguably all currency transfers abroad must be approved by the Argentine Central Bank. These restrictions have thus far applied to all transfers by Argentine entities, including payments to financial creditors located abroad. While requests for Central Bank approval have been numerous, actual approvals have been few and, in all cases, limited to import-export transactions.

Look for further executive decrees and Central Bank dispositions to relax the approval standards to enable approval for bona fide requests to pay creditors abroad. In the meantime, the market has quickly connected the demand for dollars with the supply of local currency. Private parties and exchange agencies are accepting local funds (at the market exchange rate and heavily discounted) in exchange for the transfer of dollars located abroad.

We have taken the position with banking-sector clients that the Central Bank approval mandated by the corralito, ostensibly legislated to stem the flight of dollars bought at an unsustainable one-to-one exchange rate, does not apply to transfers reflecting an exchange at the current market rate. This position is, of course, merely an interpretation and its ratification by the Central Bank remains to be seen.

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