Update of changes to the Reference Stabilization Ratio ("C.E.R.")

1. Introduction

Under the provisions of Law No. 25,561 of Public Emergency and Reform of the Exchange System and Decree No. 214/2002, all obligations of providing monetary sums expressed in U.S. Dollars or other foreign currencies - whether or not related to the financial system - existing as of January 6, 2002 were “pesified” at an exchange rate fixed by the National Government.

The massive “pesification” of the Argentine economy forced the National Government to implement the CER to index the “pesified” debts in accordance to inflation. The CER is calculated based on the consumer price index published by the INDEC.

This article is not intended to cover all the aspects in connection with the CER, but to analyze the reforms introduced by Decree No. 762/2002. For more information on the CER and its different applications, see article “The “Coeficiente de Estabilización de Referencia” (Reference Stabilization Ratio or “CER”)” published in Marval News of April, 2002. For an update on the situation of deposits in financial institutions, you can also see “Reorganization of the Financial System - Decree No. 905/2002 – Exchange of Deposits of the Financial System and Public Offering of Bonds” published in Marval News’ current issue.

2. Devaluation

The deep recession affecting the economy, together with the lack of confidence of consumers on the value of the Argentine currency and the apparent overvaluation thereof during the effect of the Convertibility Law, among other factors, have produced an important devaluation of the Argentine Peso vis a vis the Dollar, which has risen from $1 in January 2002 to approximately $4 by the end of June 2002.

Consequently, there has been an inflationary sprout of prices at consumer level which, according to the official statistics published by the INDEC, has been of 2.3% in the month of January, 3.1% in the month of February, 4% in the month of March, 10.4% in the month of April, and 4.0% in the month of May. This means that the increase in the cost of living during the first five months of the year has been 23.8%.

The significant inflation in Argentina as from January 2002 would result in a significant increase of the amounts owed under the “pesified” debts which are indexed by application of the CER.

Very soon it became apparent that it would be difficult to apply the CER in all cases. Salaries in general have not been adjusted, the unemployment rate is high and is expected to become higher. The significant increases of the consumer price index (basis of calculation for the CER) had the double effect of decreasing the debtors’ purchasing power and increasing the percentage their “pesified” debts represents of their salaries.

This has forced the Government to approve a modification of the indexation procedures, exempting certain “pesified” debts from being indexed by CER, and requiring that they be indexed by the CVS instead, which would be calculated taking into consideration the average wages of the population through a mechanism that has not been determined yet.

3. Decree No. 762/2002

On May 6, 2002, Decree No. 762/2002 for the Reorganization of the Financial System was published in the Official Gazette, setting forth certain exceptions to the application of the CER. The debts that will be indexed by the CVS instead of the CER s are the following:

a- Loans: All loans granted to individuals by financial institutions, cooperative associations, mutual benefit associations or individuals or legal persons of any nature, in the following cases:

(i) loans secured by mortgages on the single family and permanently occupied housing unit;

(ii) personal loans (whether or not secured by mortgages other than mortgages mentioned in (i) above) up to the amount of US$12,000; and

(iii) personal loans secured by pledges up to the amount of US$30,000; and

b- Leases: Leases of real property where the lessee is an individual and the property will be used as the single family and permanently occupied housing unit.

The CVS will be applied as from October 1, 2002. Up to that moment there will be no adjustments whatsoever.

The Ministry of Economy shall issue the relevant rules to apply the CVS.