New BODEN compensation for financial institutions

Law No 25,796, published on November 17, 2003, amends Article 4 of Law No 25,713 -which establishes the application and method for the calculation of the inflation adjustment rate ("CER") and the salary adjustment rate ("CVS")- and empowers the Ministry of Economy to issue new public debt bonds to compensate financial institutions for the consequences of the application of such differential rates.

The amended Article 4 of Law No 25,713 states that the CVS ratio will be applicable until March 31, 2004. This limits the life span of CVS between October 1, 2002, and March 31, 2004 (a total of 18 months). Therefore, as from April 1, 2004, no adjustment rate will be applied to obligations which are currently subject to CVS (described in Articles 2 and 3 of Law No 25,713). Additionally, the amendment establishes that as from October 1, 2002, obligations subject to CVS will accrue the interest rates stated in the original agreements, unless such interest rate exceeds the average interest rate of the Argentine financial system (the "Average Rate"). If this happens, the Average Rate will be applicable. The law assumes that following these amendments there will be no further causes for compensation. Notwithstanding the above, the fixed interest rate applicable to the "pesified" assets (plus CER) could be lower (even without considering the spread) than the interest rates of the original agreements.

Article 2 of Law No 25,796 empowers the Ministry of Economy to issue bonds (Bonos del Gobierno Nacional) in pesos with variable interest rate due in 2013 ("BODEN 2013") up to AR$ 2,800 million to fully, definitively and solely compensate the financial institutions for the consequences of the application of CVS over some of their assets and the application of CER over most of their obligations.

The terms and conditions of BODEN 2013 established by Law No 25,796 are as follows:

(i)  date of issue: April 1, 2003;

(ii) due date: October 1, 2013;

(iii) term: 126 months;

(iv)  currency: Pesos;

(v) payment of principal: 16 consecutive installments of equal amounts, equivalent to 6,25% of the total amount; the due date of the first installment is April 1, 2006;

(vi)  interest rates: average rate for deposits not subject to the system adjustments (to be determined on later regulations); interest will be paid at the end of each semester;

(vii)  the face value of the bonds submitted to each financial institution will be equal to the amount determined by the Central Bank of Argentina ("BCRA") for the compensation of each financial institution; and

(viii) the bonds will be negotiable in self-regulated markets of Argentina.

BODEN 2013 will be represented in Global Certificates that will remain in the Register and Liquidation of Public Debts and Financial Trusts Office (Central de Registro y Liquidación de Pasivos Públicos y Fideicomisos Financieros) ("CRYL") of BCRA, registered on behalf of each financial institution.

The terms and conditions of BODEN 2013 have some similarities with other series of bonds also referred to as BODEN 2013 that were issued to compensate the differences between the pesification of deposits at AR$ 1,40 plus CER for every US$ 1 and the free exchange value of the U.S. Dollars for depositors that opted pursuant to Decree No 739/2003 (so called 2 nd Exchange or Canje II ). The main difference was that the prior BODEN 2013 were denominated in U.S. Dollars and had a different rate of interest (LIBOR with a 3% ceiling).

Law No 25,796 also establishes the procedure that BCRA must follow for the calculation of the compensation for each financial institution. BCRA must consider the financial statements of each financial institution as of February 3, 2002. If CVS plus the correspondent interest rate (established by Article 4 of Law No 25,713) is higher than CER plus a fixed interest rate of 2%, the financial institution must return the BODEN 2013 received for a face value equal to the amount of such difference. The regulation of this procedure has not been established yet.

Article 5 of Law No 25,796 states that the financial institutions that accept the compensation established by Law No 25,796 will have expressly consented to the provisions of Law No 25,796, Law No 25,713 and Decree No 762/2002, as amended (each one of them related to CVS). This consent implies waiving any claim for the consequences of such regulations.

Finally, as mentioned above implementing regulations for Law No 25,796 remain to be issued; therefore, the procedure for the delivery of BODEN 2013 remains unclear. Also, for financial trusts whose assets adjust by CVS, and financial institutions retaining a residual interest, compensation remains doubtful.