Haynes and Boone, LLP
  January 11, 2002 - Dallas, Texas

ALERT: Argentine Devaluation Law
  by Patricia C Mastropierro

On January 6, 2002, the Argentine Congress passed Law 25,561 (the “Law”) that revoked the convertibility regime that established the currency board system. The old Convertibility Law maintained a fixed exchange rate of 1:1 between the peso and the US dollar. In addition, on January 10, 2002, the President issued Decree 71/2002, which outlined the types of debts to be converted from US Dollars to Pesos at 1 to 1 exchange rate. On the same day, the new Minister of Economy, Remes Lenicov issued Resolution 6/2002, which regulates the withdrawal of bank deposits. The Convertibility Law, adopted ten years ago under President Carlos Menem, had mandated that the Central Bank maintain one US dollar (or equivalent in gold) for every peso in circulation. The Convertibility Law was successful in eliminating the severe hyper-inflation inflicting Argentina at such time and set the stage for rapid economic growth in the forthcoming years. However, the weight of a prior devaluation by Brazil, coupled with a prolonged recession and a highly indebted public finance system, proved too much for the currency board contemplated under the Convertibility Law. Public Emergency Declaration – Exchange System Section 1 of the Law declared an economic, administrative, financial, and exchange public emergency. Section II provides that, based on the public emergency, the Executive Branch is empowered to establish the system which shall determine the exchange rate between the peso and foreign currencies and to issue exchange control regulations. Shortly after the Law was approved by Congress, Remes Lenicov announced the implementation of a dual exchange rate regime: (a) an “official” exchange rate set at 1.4 pesos to the dollar for export-import transactions (a devaluation of about 28.5%) and (b) a “free” rate of exchange for any other transaction. Under the Law, the Executive Branch was granted special powers valid through December 10, 2003. Amendment to Convertibility Law The Law declared void any contractual provision providing monetary adjustments, price indexation, cost changes, or debt increases. In reality, this is a mere ratification of existing law under the Convertibility Law. Obligations Affected by the Law a) Obligations Related to the Financial System i) Restructuring of Dollar denominated Debts. Dollar denominated debts with financial institutions not exceeding US$100,000 (initial contract value) are restructured and converted into pesos at an exchange rate of 1 peso = 1 dollar. Under Decree 71/2002, the Executive Branch limited the type of debts included under this measure, based on initial contract value and type of debt. The following debts are covered under the Decree: (a) mortgage loans not exceeding US$100,000; (b) personal loans not exceeding US$10,000; (c) car loans not exceeding US$15,000; and (d) loans granted to individuals or legal entities characterized as “micro, small and/or mid-sized companies,” not exceeding US$100,000. ii) Tax on Export Oil Sales. To compensate the banks, an export tax will be levied on the sale of oil abroad. The rate will be established by the National Executive Branch. iii) Restructuring of withdrawal of Bank Deposits. The Law also provides that the Executive Branch shall set forth measures to preserve bank deposits. The controversial Decree 1570/2001, adopted by President De la Rúa, that provided that individuals or legal entities may only withdraw up to US$1,000 in cash per month from their bank accounts, remains in force. In addition, Resolution 6/2002 converts checking accounts with balances above US$10,000 and saving accounts with balances over US$3,000 into certificates of deposits that may not be withdrawn until 2003. b) Obligations for Public Services Dollarized public services’ tariffs are converted into pesos at a 1 to 1 rate and cannot be increased by suppliers (notwithstanding existing concession agreements which may provide to the contrary). Under the Law, the National Executive Branch is authorized to renegotiate concession agreements in order to “compensate” the companies for the losses caused by the devaluation. c) Interim Adjustment - Private Agreements Private contracts with payment stipulated in US Dollars will be converted in pesos at an exchange rate of 1 to 1 for an interim term of 180 days. During this period, the parties should re-negotiate contracts, “sharing” the impact of the devaluation. The agreement reached by the parties will have retroactive effect to the date of the approval of the Law and payments made during the negotiation term will be considered partial payments. Price Controls The Federal Executive Branch is authorized to regulate prices for “critical goods and services” to protect the rights of users and consumers from possible negative changes in the market from monopolistic practices. Dismissals without Cause – Increase of Statutory Severance Payments Layoffs are “suspended” for a 180-day period. Layoffs made in contravention of this provision will give the dismissed employee the right to receive a severance payment equal to two times the severance payment provided by the labor laws in force at this time. Income Tax –Phase-In for Deduction of Losses The Law allows taxpayers (whether individuals or juridical persons) whose revenues or net worth, corresponding to the last fiscal year, exceed US$16,250,850 and US$8,125,425, respectively, to deduct at a rate of 20% over the next five years, any losses results resulting from the devaluation.


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