Argentine Currency Regime Update—Keeping Foreign Currency Captive

At the end of last month we wrote an article summarizing the new currency regime in Argentina ("Argentine Business Law Watch -Currency Regime: What Does it All Mean?", February 27, 2002). Since then, the executive branch and the Central Bank have released additional rules regulating foreign currency exchange controls. This article briefly updates you on these additional rules.

As reported in a previous publication ("Restructuring U.S. Dollar Obligations; Central Bank Approvals of Foreign Currency Transfers, January 16, 2002), the Central Bank restricted the purchase of foreign currency to cash transactions, unless acquired to pay financial obligations. In that case, subject to Central Bank approval, foreign currency may be acquired by check or wire transfer from a local bank account. While foreign currency transfers continue to require prior Central Bank approval, unfortunately, the approval criteria remains unspecified and the process continues to occur on a case-by-case basis.

While the restriction of currency transfers is scheduled to be lifted on April 11, 2002, the date will likely be extended by the government.

In a recent release (Communication "A" 3501), the Central Bank exempted from its approval process transfers to repay financial obligations to the extent these transfers are offset by foreign currency received into the Argentine financial system through new loans. This roll-over exception allows a party to cancel an obligation abroad, subject to terms and percentages set forth in the Central Bank release.

In our February 27^th report, we apprised you of the mandatory conversion to pesos of financial obligations and alerted you to the uncertainty of whether or not the measure was intended to have extraterritorial effect. Since then, partly reflecting an effort to quiet fears of foreign creditors, the executive branch issued Decree 410/02 to clarify the scope of the obligations subject to conversion. Two exclusions specified by Decree 410/02 are of particular interest.

The government has exempted "private and public sector obligations expressed in foreign currency" under agreements "governed by foreign law". This provision quelled the worst fears of holders of sovereign and corporate debt. A second exception to conversion applies to "international trade financing funded by financial institutions . . . as determined and regulated by the Central Bank".

To implement the trade financing exemption, the Central Bank released Communication "A" 3507. This release clarifies that the exemption applies to pre-export financing agreements "in effect" as of January 5, 2002, subject to the following additional requirements: (i) the party must be a registered and regular exporter and the financing must be commensurate with the FOB value of the exports or (ii) if the exporter fails to satisfy the foregoing requirements, the financing remains exempt if certain other conditions were satisfied as of January 5, 2002 and the financing was reasonable with respect to the exported amounts.

The Central Bank release does not specify the criteria to determine whether or not an obligation is "in effect". Nonetheless, the current policy of the Central Bank is to avoid outbound currency transfers not matched by inbound currency payments. Indeed, the Central Bank in prior periods of exchange controls did not permit the application of export proceeds other than to cancel the pre-export financing supporting the transaction or unless offset by new financing Conversations with Central Bank officials suggest this interpretation of the rules is correct under the current regime.

The text of Decree 410/02 is available at http://infoleg.mecon.gov.ar/txtnorma/72761.htm. The text of Central Bank releases Communication "A" 3501 and Communication "A" 3507 can be found at http://www.bcra.gov.ar/regysup.