New exception to the prohibition of indexation - Adjustment by CER

Decree No 1733/2004, published on December 10, 2004, establishes a new exception to the prohibition of indexation established by Articles 7 and 10 of the Convertibility Law No 23,928.Such Decree was issued by the Executive Branch as an emergency decree, in accordance with the provisions of Article 99(3) of the Argentine Constitution.

The exception involves Peso denominated bonds to be issued by the Argentine Government as a result of the exchange offer approved by Decree No 1735/2004 (see “Conditions for the exchange of debt in default” on this edition of Marval News).The principal of such bonds will be adjusted to reflect inflation based on the consumer price adjustment rate (Coeficiente de Estabilización de Referencia or “CER”).

This is a new exception to the prohibition of indexation established by the Convertibility Law.The previous exceptions were the following:

* The obligations “pesified” by Emergency Law No 25,561 were excepted from the prohibition of indexation as they are subject to the application of CER, as established by Article 4 of Decree No 214/2002, Law No 25,713 and complementary provisions.

* New financing to financial institutions and new lending granted by such institutions as from June 1, 2002, were excepted from the prohibition of indexation by Article 27 of Decree No 905/2002.Central Bank Communications “A” 3660 and “A” 3987 implemented such rule and expressly established that financial institutions may take fixed deposits adjusted by CER and grant loans adjusted by CER, respectively.

* The certificates or debt securities issued by financial trusts that have underlying assets adjusted by CER or by the salary adjustment rate (“CVS”) were also excepted from the prohibition of indexation by Article 27 of Decree No 905/2002.

* Securities issued by the Argentine Government or the Central Bank, were excepted from the prohibition of indexation by Decree No 1096/2002.

The latter also considered the indexation of public securities.However, it had certain limitations, such as: (i) the term of the securities could not be less than three months, (ii) the exception would only be valid during the emergency declared by Law No 25,561 (recently extended until December 31, 2005, by Law No 25,972) and (iii) the securities may not be used in debt restructuring transactions.