Decree 1387/2001 was published in the Official Gazette on November 2 2001 and addresses sovereign debt restructuring, the liquidity of the banking system and the restructuring of financial entities.
The local government has taken several measures in response to the current economic and financial crisis. Some of these are aimed at providing liquidity to the banking system and to financial entities undergoing liquidity crises. However, if these measures fail the regulations grant the Argentine Central Bank all the necessary tools to intervene rapidly where financial entities are in a crisis and apply remedies in order to limit the damage.
Decree 1387/2001 prepared the ground for the sovereign debt exchange. The decree regulates different matters, including an option granted to certain stock corporations to use public bonds to pay off their banking debts. The banks, which cannot reject this option, will be able to exchange these public bonds for guarantee loans or new guaranteed public bonds, to be issued by the government. So far this does not seem to have worked in the banks' favour. However, the Central Bank has issued Communication 41838 by which it will enter into repurchasing agreements (repos) or other financings, accepting those guaranteed loans or new public bonds as collateral for those transactions.
In consideration for such financings, the shareholders of the financed banks shall grant a pledge over the controlling stock and also give their consent to any future bank restructuring under Article 35(2) of the Argentine Financial Entities Law.
In order to limit the damages caused by failing banks, several amendments to the law and the Organization Act for the Central Bank were passed during the 1990s. In addition, other institutions (eg, Sedesa - the local Federal Deposit Insurance Corporation, and the Fiduciary Fund for Banking Capitalization) were created.
When a local bank starts to suffer from insolvency and/or liquidity problems, the Central Bank generally forces it to undergo a plan for regularization. Under these plans the Central Bank may grant certain temporary waivers to its regulations, provide liquidity to a troubled bank by entering into repos or other financing tools, and appoint a controller to the bank.
However, if this is not enough to help the bank through a regularization plan, then the Central Bank may freeze its business by ordering its suspension (which stops the accrual of interests due to the bank), and force it to be restructured under Article 35(2) rather than revoke its licence. Article 35(2) allows the Central Bank to order the following:
- capital increase, capital reduction and/or stock sale or transfer;
- the 'exclusion' and transfer of the assets and certain senior or preferred liabilities; and
- the appointment of a receiver.
The exclusion and transfer of assets and liabilities provided under Section 35(2) has become the Central Bank's preferred method. Deposits, Central Bank repos and financings, labour liabilities and secured credits of failing banks are transferred to one or more healthy financial entities. Specially selected assets, equivalent to the transferred liabilities before accounting adjustments, are also transferred either to financial entities undertaking the liabilities or to a trust for liquidation purposes. These Article 35(2) transactions are generally complemented by contributions made by Sedesa, soft lending by the Fiduciary Fund for Banking Capitalization and special exceptions to technical requirements.
Once the transactions are executed, the judicial liquidation of the residual bank is undertaken. Unsecured creditors must face a winding-up process, with little chance of recovering their money. Bankruptcy proceedings against a bank cannot be initiated until 60 days after its licence is revoked.
The recent regulations will provide the banking system with the necessary liquidity to undergo the proposed public debt exchange. However, if banks do fail the Central Bank now has the necessary tools to act promptly to reduce the adverse effects of insolvency.
For further information on this topic please contact Gabriel G Matarasso at Marval, O'Farrell & Mairal by telephone (+54 11 4310 0100) or by fax (+ 54 11 4310 0200) or by email ([email protected]). The Marval, O'Farrell & Mairal website can be accessed at www.marval.com.ar.