Decree No 117/2004 regulates the compensation for financial institutions established by Law No 25,79

Decree No 117/2004 was published on January 26, 2004. It includes three annexes. The first one clarifies certain matters related to Law No 25,713, the second one establishes the procedure to calculate the compensation established by Law No 25,796 and the third one establishes the procedure to calculate the average interest rate of the financial system, used (i) for the compensation and (ii) as the interest rate of the bonds issued pursuant to the same compensation.

1. Clarifications to Law No 25,713

Law No 25,713, published on January 9, 2003, establishes which obligations are subject to the salary adjustment rate (“CVS”). Such obligations were originally established by Decree No 792/2002, published on May 7, 2002; therefore Law No 25,713 granted them a higher legal status. On this particular matter, Law No 25,713 and Decree No 762/2002 had some differences that needed to be reconciled.

Decree No 762/2002 establishes the application of CVS as from October 1, 2002, to every mortgage loan exclusively for family housing, without limit of amount. Law No 25,713 limited the application to the same obligations up to US$ 250,000. Law No 25,796 resolved this contradiction by establishing that CVS will apply to the cases described by Decree No 762/2002 that exceed the amount of US$ 250,000 as from October 1, 2002, and up to the date Law No 25,713 started to apply. As from such date, CER will be applicable to such obligations.

Articles 7, 8 and 9 of Law No 25,713 establish a procedure for restructuring obligations to which CER applies and do not exceed the amount of US$ 400,000 in aggregate of debt to the financial system by February 3, 2002. Decree No 117/2004 establishes March 1, 2004 as deadline to enter this procedure.

2. Implementation of compensation established by Law No 25,796

As we mentioned in our previous article on this matter (please see “New BODEN compensation for financial institutions” published in Marval News # 23 of November 28, 2003), Law No 25,796 empowered the Ministry of Economy to issue new public bonds to compensate financial institutions for the consequences of the application of CER and CVS up to an amount of US$ 2.8 billion.

Decree No 117/2004 established the procedure applicable to such compensation, clarifying some of the questions that had arisen.

As the compensation is optional, financial institutions will be able to choose whether to participate. Moreover, financial institutions can apply for partial compensation. To do so, they must inform the Central Bank of Argentina the percentage of the compensation they are applying for.

To ease up the calculations, the compensation will be divided into three lines of credit: (i) mortgage loans, (ii) chattel mortgage loans and (iii) consumer loans.

The amount of the compensation for each type of credit shall result from the difference between (a) CER plus a fixed interest rate of 2% and (b) CVS plus the average interest rate of the financial system (as defined in Annex III of Decree No 117/2004). If the result is positive, the Argentine Government will compensate the financial institutions and viceversa, if the result is negative, financial institutions shall compensate the Argentine Government. If the overall result exceeds US$ 2.8 billion, the compensation shall be proportionally distributed among the financial institutions.

The compensation by financial institutions will be in different types of bonds to be delivered to the Argentine Government. Such bonds are described in Article 10 of Annex II of Decree No 117/2004. Any bonds denominated in dollars will be applied at the relation US$ 1 = $ 1.40 plus CER.

The procedure will conclude when, for each type of credit, the sum of CVS plus the average interest rate of the financial system shall be equal or greater than the sum of CER plus the fixed interest rate of 2%. If the term of a particular line of credit exceeds the due term of the bonds that will be issued for this compensation (i.e., “BODEN 2013”) and the procedure has not ceased, the compensation will be paid in cash. It is important to be aware that these BODEN 2013 are denominated in pesos, while BODEN 2013 received by depositors under the so-called “Canje II” (Swap II) are denominated in US$ and have other differences.

It is important to point out that the availability of the bonds will be conditioned to the fulfillment by the financial institution of: (i) granting new lending as from February 3, 2002, or (ii) restructuring old loans, improving their terms and conditions.

Finally, related to a question we had posed in our previous article, Decree No 117/2004 establishes that the compensation will also apply to loans that belonged to a financial institution and were transferred to a financial trust before January 1, 2002. In such cases, the compensation shall be for the financial institutions which hold the trust securities, up to the amount of the loans transferred.

3. Average interest rate of the financial system

The average interest rate of the financial system is used two-fold: (i) to calculate the compensation, and (ii) to determine the interest rate of BODEN 2013. Annex III of Decree No 117/2004 establishes the procedure for its calculation.

In connection with the interest rate of BODEN 2013, such rate will result from the average of the daily rate for an 180-day period which concludes 20 business days before the due date of the interest payments.