By Damiana Ponferrada and Diego Serrano Redonnet, with Perez Alati, Grondona, Benites, Arntsen & Martinez de Hoz in Buenos Aires

The Duhalde government ordered mandatory “pesofication” of debts, and the Argentine Congress formally declared a new emergency — this time a “social and credit emergency” — and passed a heavily criticized new bankruptcy law.  Both actions took place in February.

The government has since issued additional decrees to answer questions raised by the pesofication order.

The new emergency will remain in place until December 10, 2003.  The legal significance of emergency declarations, like the latest one, is they give the Duhalde administration and the Argentine central bank broad powers to issue decrees, rules and regulations to respond to the emergency.

New Bankruptcy Law

The new bankruptcy law officially took effect on February 14.  It eliminated the “cram-down proceeding,” a special salvage proceeding under which, after failing to approve the debtor’s reorganization plan, creditors and third parties could acquire the company through a special bidding process.  Under the new law, rejection of a reorganization plan will be automatically followed by the debtor’s bankruptcy.

The 60-day “exclusivity period” in which debtors could file restructuring proposals was extended to 180 days and debtors are now allowed to shed 100% of their debts in bankruptcy.  In the past, a debtor could only disavow 60% of each admitted claim.

The law suspends all existing reorganization proceedings for at least 180 days measured from February 14, 2002.  It also suspends for 180 days all foreclosure proceedings (other than certain specified exceptions such as alimentary or labor credits), including foreclosures of mortgages and pledges, all preliminary measures affecting a debtor’s assets or business — such as attachments and preliminary injunctions — and all bankruptcy proceeding petitions. There is uncertainty as to whether the 180-day period should be counted on the basis of calendar days or court working days.

These new bankruptcy provisions will remain in effect through December 10, 2003.  However, many creditors are afraid that the Argentine government may decide to extend them.

Mandatory “Pesofication”

The Duhalde government announced the mandatory conversion of all US dollar-denominated obligations into Argentine pesos on February 3. The announcement is in Decree No. 214/02.  Except for bank deposits that are converted at a rate of exchange of one US dollar = 1.40 pesos, all debts with the financial system and all monetary obligations due and payable that are not related to the financial system are converted at an exchange rate of one US dollar = 1 peso.

The lack of clarity of the decree has led to many questions, including whether all future payments arising under long-term contracts should be “pesofied” and whether such “pesofication” is limited to payments maturing within the period of economic emergency declared by Congress (through December 10, 2003).  Contracts entered into after January 6, 2002 are not covered by the “pesofication” decree and contracts in foreign currency continue to be permitted in Argentina.

All “pesofied” bank deposits and monetary obligations are to be adjusted pursuant to an index rate called the “Coeficiente de Estabilización de Referencia,” or “CER,” to be published by the Argentine central bank.  This index rate will be tied to the Argentine consumer price index. The central bank has also been given the power to set a minimum interest rate for bank deposits and a maximum interest rate for loans.

In the case of monetary obligations not related to the financial system denominated in foreign currency, if the value of the consideration were to be higher or lesser than the price to be paid at the time of payment after adjustment by the CER, either of the parties may take the case to court.

Pesofication Exceptions

The Duhalde government issued a second decree to answer some of the questions raised by the first one.  This is Decree No. 410/02.

It exempts the following obligations from the mandatory pesofication: foreign trade financings, credit card balances corresponding to purchases made outside Argentina, deposits made by foreign banks or financial entities in local financial entities to the extent such deposits are transformed into credit lines for a term not shorter than four years in accordance with regulations to be issued by the central bank, futures and options contracts (including those registered in the self-regulated markets and accounts exclusively allocated to such transactions in such markets), redemption of interest in mutual investment funds, and public and private sector monetary obligations denominated in foreign currency and governed by foreign law.

The exemption from pesofication for obligations governed by foreign law dispels doubts raised earlier about whether judgments issued by foreign courts against Argentine borrowers or companies in relation to obligations arising under contracts not governed by Argentine law can be enforced in Argentina.

Outbound Remittances

The Duhalde administration has dropped its effort to maintain a two-tier exchange rate for pesos into dollars. The peso now floats freely against the dollar with intervention of the central bank through sales and purchases of US dollars.

However, restrictions on foreign exchange transfers outside Argentina remain in place. The central bank decides which transfers of funds out of the country may be made without its prior authorization and which transfers require its prior approval.  Regulations have been issued on this subject by the central bank.

The following outbound remittances may be made freely: the payment of expenses related with fairs or exhibitions made for the promotion of exports, payments for imports of goods and services, other payments for services, and the payment of obligations to international organizations or to banks that are party to a project financing cofinanced by international organizations or to official credit agencies.

Remittance of foreign currency outside Argentina starting February 11, 2002 to pay the principal and interest of financial obligations (except for those obligations with international organizations mentioned above) must be authorized by the central bank.

Exports

Argentina reimposed controls on converting sales proceeds from exports.  Exporters must transfer into, and negotiate in, the Argentine financial system the funds obtained from their export transactions. The central bank has established certain exceptions by allowing exporters in certain specific cases to allocate their export proceeds to payments abroad.  Criminal sanctions will be imposed on entities that breach the exchange control regulations.

The Duhalde government has also imposed export duties on most exports, ranging from 5% to 20% depending on the goods to be exported.