Use of the Central Bank reserves in Argentina

1. The Bicentennial Fund

In December, 2009, the Argentine Executive Branch issued the Decree of Need and Urgency No 2010/2009 of the Argentine Executive Branch (the “2010 DNU”) creating the “Bicentennial Fund for Indebtedness Reduction and Stability”, which was to be funded with freely available reserves of the Central Bank of the Republic of Argentina (the “Central Bank”). To such effect, the 2010 DNU also amended Law No 23,928 (known as the “Convertibility Law”) to allow the use of freely available reserves of the Central Bank for the payment of sovereign debt (which would include not only debt with international financial organizations, but also debt with private creditors). As amended, Article 6 of the Convertibility Law would provide that: “The freely available reserves may be applied to the payment of obligations entered into with international financial organizations and to the payment of debt services of the National State”.

Argentina restructured 76% of its debt with private creditors in the year 2005. The Argentine Government intends to launch during the upcoming months a new debt restructuring offer for the exchange of debt in default with the remaining bondholders (holdouts) who did not tender their bonds in the 2005 debt exchange. Within this context, the creation of a fund that would hold assets that would be allocated to the payment of 2010 maturities would place the country in a better position to negotiate the new debt exchange.

The 2010 DNU instructs the Central Bank to transfer reserves to the Treasury Department (Tesoro Nacional) for the amount of US$ 6,569 million to fund the Bicentennial Fund, of which US$ 2,187 million would be applied to pay debts with multilateral agencies and US$ 4,382 million would be applied to pay maturities of bonds held by private bondholders. As consideration for the transfer, the Central Bank would receive a treasury bill denominated in dollars with a ten year maturity.

The creation of the Bicentennial Fund, and more significantly the use of the Central Bank reserves to fund the same, has triggered an intense debate which involves the Executive, Legislative and Judicial Branches of the Republic of Argentina.

2. Background and precedents

Pursuant to its Charter Act enacted by Law No 24,144, the primary and essential purpose of the Central Bank is to preserve the value of the Argentine currency. This provision is complemented by Law No 23,928, which states that the reserves: must be applied to support 100% of the monetary base[1], will not be subject to attachments and may only be applied for the purposes provided by law.

The Argentine Constitution provides that “it is a power of the Congress to arrange the payment of the internal and external debt of the Nation”[2]. Consequently, the payment of debt falls within the scope of powers of the Legislative Branch.

The Argentine Constitution provides that the Executive Branch shall in no event issue provisions of legislative nature, which if issued shall be absolutely and irreparably null and void (Article 99, subsection 3). This general prohibition may only be overridden in exceptional circumstances, such as the Congress being unable to operate or the matter being so urgent that it cannot be postponed until the normal legislation procedure may be followed by Congress, in which case the Executive Branch is empowered to issue decrees on the grounds of need and urgency (hereinafter, “DNU” or “Decrees of Need and Urgency”).

Once a DNU is issued by the Executive Branch, it must be submitted for the consideration of the Joint Standing Committee of Congress (Comisión Bicameral Permanente), pursuant to the procedure regulated by the Argentine Constitution and the provisions of Law No 26,122. The Committee shall decide as to the validity or invalidity of the DNU and submit its report for the consideration of both houses of Congress. The houses shall expressly consider and vote the acceptance or rejection of the DNU. The DNUs shall continue to be in full force except if or until they are rejected by both houses within the approval procedure of the DNU, or if they are abrogated by the Congress pursuant to its ordinary powers related to abrogation.

At the end of the year 2005, in order to cancel the debt with the International Monetary Fund (“IMF”) for the aggregate amount of US$ 9,530 million, the Executive Branch issued a DNU which amended Law No 23,928 to allow that reserves surplus (once the monetary base is covered) may be used to pay debt owed to international financial organizations. The payment to the IMF constitutes a precedent in which the reserves of the Central Bank were used to pay sovereign debt.

The payment to the IMF was implemented by the DNU No 1599/2005 issued by the Executive Branch, which

(i)          amended Article 5 of Law No 23,928 to introduce the concept of “freely available reserves”, defined as those reserves exceeding the support of 100% of the monetary base; and

(ii)         amended Article 6 of Law No 23,928 as follows: “As long as it results of a neutral monetary effect, the freely available reserves may be applied to the payment of obligations entered into with international financial organizations.”

DNU No 1599/2005 was ratified by Law No 26,076. On the grounds of these measures, Argentina cancelled its debt with the IMF using the reserves of the Central Bank. The payment was made in January 2006.

3. The debate for the use of reserves

The current conflict and debate initiated when the Central Bank chairman, Martín Redrado, refused to comply with DNU 2010 that ordered the transfer of the Central Bank reserves to the Bicentennial Fund. Among other arguments, he alleged that the transfer of the reserves would result in a considerable risk that they would be attached by the creditors of bonds in default (holdouts) who obtained favourable rulings in their claims against the Republic of Argentina and are seeking their enforcement, bearing in mind that:

(i)          the funds would ultimately be used to pay private creditors, which pursuant to the laws of the State of New York (where the outstanding procedures against Argentina for the debt in default are being carried out) would be considered as payments made for “commercial purposes” which do not have sovereign immunity; and

(ii)         the transfer of the reserves was being made by the Executive Branch without the consideration of the Congress, which would confirm the claim of the creditors that the Central Bank is an “alter ego” of the Argentine Executive Branch, as opposed to an independent entity as provided by the Charter of the Central Bank.

Pursuant to the terms of its Charter Act, the Central Bank is a self-administered institution of the National State and shall not be subject to any order, recommendation or instruction given by the Executive Branch[3]. Consequently, the order contained in the 2010 DNU to transfer reserves to the Bicentennial Fund would weaken the independence principle that constitutes a basic defence to resist the claims of Argentina’s creditors.

The main differences between the use of reserves to pay the IMF in the year 2006 and the current intended use of the reserves to fund the Bicentennial Fund are the following:

(i)          the payment to the IMF was instrumented by a DNU which was ratified by a law passed by the Congress prior to be payment being made, while the transfer of reserves to create the Bicentennial Fund has not yet been considered by the Congress; and

(ii)         the cancellation of debt with the IMF consisted in a payment made to a multilateral credit organization, while the Bicentennial Fund is aimed at cancelling debt with private creditors (in addition to making payments to international organizations).

This conflict ultimately resulted in the removal of Mr. Redrado as Chairman of the Central Bank. Federal Judge Mrs. María José Sarmiento issued a temporary injunction suspending the transfer of reserves for the purposes of funding the Bicentennial Fund until the matter was considered by Congress. Her ruling was affirmed by the Court of Appeals. In order to reverse such rulings, the Argentine Government filed an extraordinary appeal for the matter to be considered by the Supreme Court. The appeal was granted without suspending the effects of the precautionary measure, which therefore will continue to be effective until the appeal is resolved by the Supreme Court.

The debate as to the use of the Central Bank reserves still continues and will be considered by Congress in the near future.