Amendments to the Central Bank’s Charter and the Convertibility Law

On March 28, 2012, Law No. 26,739 was published in the Official Gazette, which amends the Charter of the Central Bank of the Argentine Republic, approved by Law No. 24,144 (the “Charter”), and the Convertibility Law No. 23,928 (the “Convertibility Law”).

The amendments introduced by Law No. 26,739 may be grouped in two main topics. On the one hand, amendments to the functions and powers of the Central Bank as the regulatory and supervisory authority of the financial system. On the other hand, expansion of the Federal Government’s access to financing from the Central Bank.

Below is a brief summary of the main amendments introduced by Law No. 26,739.

1. Functions and powers of the Central Bank

a) Purpose of the Central Bank. Until Law No. 26,739, according to the Charter, the “primary and fundamental purpose” of the entity was to “preserve the value of the currency”. From now on, the Central Bank will have a multiple purpose, which will include “promoting currency stability, financial stability, employment and economic development with social equity”.

b) Relationship of the Central Bank with the Executive Branch and the Congress. Under the amended Charter, the Central Bank remains as an “self governed entity”, and the following provisions also remain in effect: (i) that in the exercise of its powers and faculties the Central Bank shall not be subject to the instructions of the Executive Branch, and (ii) that the Central Bank may not enter into any obligation that implies a restriction or a delegation of its powers, without Congress’s express authorization. However, the amended Charter provides that the Central Bank’s purpose must be fulfilled “within the framework of the policies set by the Federal Government”.

c) Obligations and powers of the Central Bank related to economic information. The amendments to the Charter limit the ability of the Central Bank to supply economic information. In this respect, the following have been deleted: (i) the requirement to report the expected rate of inflation for each year; (ii) the publication of statistics regarding the balances of payment and the national accounts of the Argentine Republic; and (iii) the requirement that the entity’s financial statements reflect the amount and composition of the reserves and of the monetary base.

d) Functions and powers of the Central Bank. New powers have been vested in the Central Bank, including: (i) to regulate the amount of money and the interest rates, and direct credit policies; (ii) to regulate payment systems, liquidating and clearing houses, fund remittance entities, and transportation of value companies; and (iii) to protect the rights of consumers of financial services and fair competition within the financial system.

e) Powers of the Central Bank’s President. The amendments strengthen the powers of the President of the Central Bank’s Board of Directors. In this respect: (i) the Superintendency of Financial and Foreign Exchange Entities (which will no longer be a deconcentrated entity) is now under the President’s supervision; (ii) the President is empowered to operate directly in the currency and foreign exchange markets (formerly, these powers were vested in the Central Bank’s Board of Directors), and (iii) the President’s powers in emergency situations are increased.

f) Powers of the Central Bank’s Board of Directors. New regulatory powers are expressly conferred to the Board, such as: (i) to establish the information and accounting regime for the entities subject to the Central Bank’s supervision; (ii) to regulate credit conditions and policies; (iii) to enact rules that preserve competition in the financial market, and (iv) to regulate the obtention (through negotiable instruments or otherwise) by financial institutions of foreign currency funds

2. Financing of the Federal Government

a) “Temporary Advances”. The amendment of the Charter significantly increases the Central Bank’s ability to grant “temporary advances” to the Federal Government.

Pursuant to the Charter, the Central Bank may grant temporary advances to the Federal Government for a term of up to twelve months, with no specific allocation, for an amount equivalent to 12% of the monetary base (which includes, for the purposes of this article, outstanding currency and demand deposits of financial institutions with the Central Bank, in checking or special accounts).

In addition, advances may be granted (also for a twelve-month term) for an amount equal to up to 10% of the resources in cash that the Federal Government has obtained in the last twelve months; but these “additional” advances have to be specifically allocated to the payment of obligations with international financial institutions and to the payment of obligations in foreign currency.

The amended Charter maintains the possibility of granting temporary advances within the limits described above, but the amendment also provides that, “exceptionally”, “additional” advances may be granted for up to another 10% of the resources in cash that the Federal Government has obtained in the last twelve months, for an eighteen-month term. In addition, the requirement of specific allocation mentioned before has been abrogated. As a result, all of the “temporary advances” that the Central Bank may grant may be allocated to the purpose that the Federal Government decides at its sole discretion.

b) Determination and application of the “freely available” reserves. The amendments to the Convertibility Law abrogated the requirement that the Central Bank’s reserves must underpin up to 100% of the monetary base.

Now the Central Bank’s Board of Directors shall determine the amount of reserves necessary to carry out the foreign exchange policy, taking into consideration the evolution of the external accounts.

Consequently, the “freely available” reserves will no longer be constituted by those that exceed the amount necessary to underpin up to 100% of the monetary base. The “freely available” reserves will now be those which exceed the amount determined by the Board of Directors in the manner contemplated above.

The amendments to the Convertibility Law also broaden the scope of application of “freely available” reserves. In addition to the payment of obligations with international financial institutions, pursuant to the reform approved by Congress the “freely available” reserves may also be applied to the payment of “official bilateral external debt”. This last concept includes the debt that the Argentine Republic has with creditors grouped together in the “Paris Club”.

c) Argentine Fund for Indebtedness Reduction. This Fund was created through Decree No. 298/10 in order to apply “freely available” reserves of the Central Bank to the payment of sovereign debt held by private creditors. This Fund is composed by the “freely available” reserves allocated for each fiscal year (for 2012, it amounts to almost US$ 5.7 billion). Law No. 26,739 provides that this Fund will continue to operate until the purpose for which it was created has been fulfilled.