The Reference Stabilization Ratio ("Coeficiente de Estabilización de Referencia" or "CER")

1. What is the CER?

The CER is a reference stabilization ratio introduced by Decree No. 214/02. The CER is published monthly by the Central Bank of the Republic of Argentina, following the guidelines set forth by the Ministry of Economy in Resolution No. 47/2002, which basically reflects the daily variation of the monthly evolution of the consumer price index published by the Argentine INDEC (Instituto Nacional de Estadísticas y Censos).

The Central Bank has the obligation of publishing this ratio on the 7th day of each month. As of the date of publication of this article, the Central Bank has already published the applicable ratios until May 6, 2002.

2. To which obligations does the CER apply?

Decree 214/02 provides that the CER will apply to:

(a) The obligations related to the financial system, including:

(i) deposits denominated in Dollars or in another foreign currency existing within the financial system existing as of January 6, 2002, which were converted into Pesos at $ 1.40 to the Dollar or its equivalent in a foreign currency;

(ii) loans or other debts with the financial system (v.g. loans) denominated in Dollars or in another foreign currency, existing as of January 6, 2002, which were converted into Pesos at $ 1 to the Dollar or its equivalent in a foreign currency;

(iii) debts denominated in Dollars or in another foreign currency assigned by a financial institution to a financial trust (v.g. securitization of pledge loan credits) existing as of January 6, 2002, which were converted into Pesos at $1 to the Dollar or its equivalent in a foreign currency; and

(b) The obligations not related to the financial system, including all obligations of providing monetary sums expressed in Dollars or in a foreign currency, existing as of January 6, 2002, which were converted into Pesos at $ 1 to the Dollar or its equivalent in a foreign currency.

These money payment obligations may be of different origin. They may arise, for example, from leases, purchase agreements, services contracts, insurance contracts, loans not related to the financial system (the popular mortgage loans available through notaries public). They may also be non-contractual obligations, such as obligations to pay damages or payment obligations ordered by a judgment.

(c) Money payment obligations which may not be indexed by CER. The CER will not be applied to money payment obligations which were originally denominated in Pesos as of January 6, 2002 (which therefore were not “pesified”) nor to new obligations in Pesos or in foreign currencies which were originated after January 6, 2002.

3. How is the CER applied?

To calculate the adjustment by the CER between two given dates, it is necessary to: (i) divide the ratio of the date to which the adjustment is to be made by the ratio of the date from when it is to be made; and (ii) multiply the result by the sum to be adjusted.

Example:

- A pesified debt of $ 100,000.
- The CER ratio of February 2, 2002 = 1.000.
- The CER ratio of May 2, 2002 = 1.0906.

To adjust a debt from February 2 to May 2, the following calculations need to be made:

Original debt x (CER of May 2, 2002 / CER of February 2, 2002) = Adjusted debt; i.e.:
$ 100,000 x (1.0906/1.000) = $ 109,060, which is the $100,000 debt of February 2, 2002 adjusted to May 2, 2002.

4. In practice, how is the CER applied to each case?

(a) Obligations not related to the financial system

We will use the following example:

- a debt in U.S. Dollars;
- derived from an agreement existing as of January 6, 2002;
- the debt is not related to the financial system;
- the debt is due on March 31, 2002;
- the original debt is of US$ 100,000.

To know which is the amount of such debt at maturity (March 31, 2002), the following calculations have to be made:

- the original US$ 100,000 have to be converted into Pesos, at the rate of US$ 1 = $ 1. The result of this is $ 100,000.
- Those $ 100,000 have to be multiplied by the ratio of the relevant due date. In the example, the due date is March 31, 2002. The ratio published by the Central Bank for that date is of 1.0481, which need to be divided by the rate of the original date (1.0000).
- This results in a debt of $104,810 as of March 31, 2002.

(b) Obligations related to the financial system - Loans

(i) Loans payable in installments

Example:

- a loan obtained from a financial institution in U.S. Dollars;
- derived from an agreement existing as of January 6, 2002;
- payment in installments of principal and interest (French system);
- the monthly installment for January 2001 was $ 2,000 (principal: $ 800 plus interest: $ 1,200);
- loan due on March 31, 2005;
- the original debt is of US$ 100,000.

Application of the new system:

All the debt is converted into Pesos at the rate of $ 1 = US$ 1 or its equivalent in other foreign currencies.

The value of the installment payable on a monthly basis is frozen at $2,000 during the period between February 4, 2002 and August 3, 2002, being those payments registered as “provisional payments” (pago a cuenta) of the services due during such period, which will be calculated as explained below.

The principal amount owed as of February 4, 2002 must be recalculated monthly by applying the CER until the maturity date of the loan. The principal amount paid on each service must be deducted from the balance of the restated principal amount.

Interest will be calculated monthly on the basis of the restated principal amount and using rates agreed upon between the parties. The regulations of the Central Bank of the Republic of Argentina (the “BCRA”) limit the maximum interest rates that may be agreed (for example: the BCRA regulations provide a maximum interest rate of 3,5% p.a. for individuals or 6% p.a. for legal entities with loans secured by pledges or mortgages).

The resulting balance as of August 3, 2002 must be restructured, applying with the terms and rates agreed by the parties (taking into consideration the limitations mentioned above). The rules of the BCRA provide that “the amount of the first installment resulting from the debt restructuring must not [be higher] than the amount of the last installment paid according to the originally agreed conditions”. It is not very clear how this restructuring will be implemented, nor the final impact it will have on existing debts.

(ii) Bullet loans

Example:

- a loan obtained from a financial institution in U.S. Dollars;
- derived from an agreement existing as of January 6, 2002;
- principal amount due on June 30, 2002 (payment: 100% of the principal amount);
- Interest is payable monthly;
- the original debt is of US$ 100,000.

Application of the new system:

The loan would be “pesified” at a 1:1 rate, which would result in a $100,000 debt.

The CER would be applied to the principal amount owed, using the same method explained in the preceding section.

A waiting period is fixed for payment of the principal amount. The rules of the BCRA provide for a waiting period of six months as from the original maturity date, which period may not extend beyond August 31, 2002. Therefore, in our example the total restated principal amount would be payable on August 31, 2002.

Interest would be payable on the originally agreed dates (in our example, on a monthly basis) and would be calculated on the principal amount owed adjusted by the CER.

The parties may freely agree upon the terms of the potential refinancing, but may not apply indexation or other adjustment clauses in such refinancing.

5. Debtors who as of January 6, 2002 were already in arrears benefit from the “pesificación” (and application of the CER) or must they pay the U.S. Dollars they should have paid before January 6, 2002?

With some few exceptions, all obligations of providing monetary sums expressed in foreign currency existing as of January 6, 2002 have been converted into Pesos at the rate of US$ 1 = $ 1 (or US$ 1 = $ 1.4 for deposits with financial institutions) and are being indexed by CER. This includes obligations due after January 6, 2002 as well as obligations due prior to such date that were in arrears.

Creditors, debtors who are not in arrears as of January 6, 2002, or debtors who are in arrears for reasons not attributable to them, may request an equitable adjustment of the debt if, due to the application of the CER, the value of the good, rights or service were lower or higher than it was at the moment of payment. On the other hand, debtors who were already in arrears as of January 6, 2002 for reasons attributable to them, may not request an equitable adjustment of their debts.

6. Is there a six-month term during which the CER will not be applied?

The CER will be applied as of February 3, 2002 to all foreign currency denominated money payment obligations which were converted into Pesos as of January 6, 2002 (see question 2 above).

Regarding the obligations related to the financial system, the CER will be applied from February 3, 2002, although: (i) in the case of payments in installments, the value of the installment will not be increased until August 3, 2002, date on which the debt should be restructured, and (ii) in the case of other obligations not payable in installments, a six-month waiting period has been provided, which cannot extend beyond August 31, 2002 for the payment of principal, as adjusted by the CER (see question 4 above).

7. Is there any maximum interest rate for the debts converted into Pesos indexed by CER?

In the case of obligations not related to the financial system, the accrual of interest will depend on the type of debt. For example, in the case of a loan agreement not related to the financial system which sets forth that the debtor shall pay, apart from a monthly installment of principal, the interest accrued on the principal amount owed, the creditor will be entitled to claim the principal installment (converted into Pesos and adjusted by the CER) plus interest at the agreed rate.

In other cases, interest may also be accrued even if the parties have not agreed upon a given rate. An example of this would be a tort claim, in which the debtor owes, apart from the compensation for the damages caused, interest as from the moment the damage occurred. In these cases, if the parties do not reach an agreement, the interest rate will be fixed by the courts. Judges should take into account that the interest rate to be applied should not include a compensation for inflation, as it is compensated by applying the CER.

The maximum interest rates published by the Central Bank are only applicable to obligations related to the financial system.

8. Can the application of the CER be agreed in new agreements in Pesos?

It is a normal thing that the parties that wish to enter into an agreement in Pesos would want to adjust their obligations so as to reflect inflation. Naturally, the question is whether the CER may be applied to adjust the debt in accordance with inflation.

The CER may only be applied to the obligations of providing monetary sums expressed in foreign currency existing as of January 6, 2002. Law No. 25,561 prohibits indexation or any form of re-potentiation of debts. The application of the CER to agreements entered into after January 6, 2002 would be a way of debt re-potentiation prohibited by law.

9. May the parties agree that the CER will not be applied?

Although the applicable rules allow the creditor to require the adjustment of obligations converted into Pesos by the CER, the parties may freely agree not to apply the CER.

In fact, the parties may readjust all the agreement to the new circumstances. This would even allow the parties to negotiate the conversion of their “pesified” obligations into Dollar or other foreign currency denominated obligations

10. Can the validity of the CER be questioned?

The recently issued rules on the “pesificación” of the Argentine economy have deeply affected all legal relations. The constitutionality of many of these rules is being questioned at court. The application of the CER is no exception.

Several bills have been introduced at the National Congress to eliminate or amend the CER. One of such bills, which has been approved by the House of Senators, provided that the CER will be replaced by a Salary Variation Ratio (in Spanish, Coeficiente de Variación Salarial or “CVS”) that would index debts on the basis of the average salary increases, rather than on the basis of the CER which reflects the inflation.

So far, no significant court ruling has resolved neither the constitutionality nor unconstitutionality of the CER, and the National Congress has not approved any bill that amends or eliminates the application of the same.