G.BREUER
Since 1869
A Full Corporate Services Law Firm
GBA Newsletter January 2004
To
clients and friends:
Welcome
to the January edition of our Newsletter, a monthly e-bulletin prepared
by the firm bringing you a periodic update of some current events in
Argentina.
In
this issue we provide you:
President Kirchner visits Spain
It
is a pleasure to be in contact with you. If you would like more information
please do not hesitate to contact us.
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President
Kirchner recently returned from a diplomatic visit to Spain. During his
trip he met up with banks, representatives of business with investments
in Argentina and the President of Spain. We went to Spain to attract
investors as well as to discuss the issue of the freeze on public
utility rates of which Spanish companies and banks have a major share.
In addition, he took the opportunity to promote Argentine tourism in one
of the biggest tourist fairs in the world. Finally, he briefly discussed
the issue of the thousands of undocumented Argentines who have
immigrated to Spain.
Kirchner expressed to the Spanish companies that Argentina wants more investments, the arbitration proceedings against it to be dropped and more support for debt restructuring. Spanish companies are concerned about the freeze on utility rates. In particular they are interested in seeing great legal security and access to the local financial market to cover their risk and until such time they are reluctant to make new investments. Nonetheless, while in Spain some of the utilities announced investments to be made in the telecommunications industry.
Many
in the international community (including bankers groups) are
complaining that the IMF, lending money to Argentina “in arrears” is
breaking the rules of the Fund, which requires debtor countries to
negotiate diligently with their creditors prior to the IMF lending it
money. They claim that
Argentina is not making a good faith effort to negotiate with its
creditors by continuing to offer a 75% reduction in their debt.
In
the meantime, the IMF continues to pressure Argentina to reach an
agreement with their creditors. It has requested it to offer more money
than the 75% cut it is offering now and at the minimum to be more
“friendly” or “constructive” in its negotiations. They are
concerned about the slow progress and the transparency of the
negotiations.
Despite
several abstentions from countries with major creditors and a few week
delay, the IMF board voted to approve the first review of Argentina’s
progress enabling the country to receive $358 million of the 12.55
billion three year IMF loan agreement to be paid out of over the term of
the agreement as Argentina passes milestone reviews. The IMF claims that
Argentina surpassed many goals this time around influencing its decision
to approve the first review. The terms of the loan agreement were not
modified for the next review. As the major shareholder of the IMF, the
US was a key player in obtaining approval of the review. Approval also
cleared the way for a $5 billion World Bank loan that was put on hold
pending IMF approval. This loan will
be used for social plans.
Bondholders
were hoping for more pressure from the IMF and are surprised at
Argentina’s unwillingness to offer more money in their debt
restructuring proposal. Kirchner says he still intends to hold strong to
his 75% cut plan and that it is the short term funds that are pressuring
for quick resolution but other small investors would benefit more from a
restructuring. Creditors want 65 cents on the dollar minimum and say
that if Argentina does not budge it could be facing onslaught of
lawsuits and decrease in investments.
Argentina’s second IMF review is scheduled for mid March. However, on March 9 Argentina has to make a payment to the IMF and they claim they will only make the payment if the IMF approves the review. Therefore, in order to expedite the review, Argentina has managed to convince the IMF to arrive sometime mid February. The Ministry of Economy claims that Argentina has already met all the second review goals and is anxious to receive prompt IMF approval to prevent others from pressuring the IMF into disapproving the review. At the next review the main focus will be Argentina’s progress in its debt restructuring and banking reforms. Countries most affected by the debt restructuring (e.g. Japan, Italy Germany) are less likely to vote in favor next time around.
The Global Committee of Argentine Bondholders, in the meantime, is going to try to stop the March review from being approved if no progress is seen in debt negotiations. The IMF is pressuring Argentina to accept a meeting with the Committee.
Argentina
is still struggling to appoint the banks that will advise it on the
country’s debt restructuring plan. Supposedly,
two other major international banks have dropped out of the bid
leaving very few banks. The main reason cited for their reluctance to
participate is disagreement as to fees. The banks did manage to include
the ability to rescind the contract for breach of government in the
deal. The backing out of so many banks is causing some to speculate that
Argentina is having trouble with getting support for its offer.
Argentina was supposed to have banks selected by end of 2003. It is not
that common that no banks participate in a sovereign debt restructuring;
however, Argentina is contemplating the option of moving forward without
any bank.
The
Global Committee of Argentine Bondholders held its first meeting to
determine future strategy
of negotiations with Argentina. The Group comprises almost half of
Argentina’s debt and in order to be a member you must not have
initiated legal action against Argentina. However, the Group does not
discard eventually initiating legal action if talks fail. There initial
interest is to negotiate and as such have invited President Kirchner to
a meeting in New York this month.
Back in Argentina, local creditors have approached the government with a counter-offer of exchanging their bonds for a perpetual bond that would pay interest at 4% during the first five years and then be fixed to an interest rate like Libor. Expectations are that these bonds could eventually be used to buy real estate or pay taxes.
In
the cases being heard by New York Judge Griesa brought by certain
creditors of Argentina, Argentina had requested the Court to establish a
limited scope of the application
of parri passu of its debts (i.e the concept of having to treat
all its debtors the same). The
Federal Reserve Bank of New York supported Argentina’s position by
filing a amicus curiae brief saying that if the injunction on payments
to other creditors is issued it would cause serious problems to the
financial market and threaten payments to of badly needed IMF loan.
Plaintiff’s response is that they never asked to use pari
passu so Argentina should not be able to ask for a ruling on the
matter. The Court held that it would not rule on this at this point and
required the Plaintiffs to give 30 days notice if they intend to use pari
passu to block any payment. In the meantime Argentina continues to
make payments to IMF and some domestic investors while it negotiates
with private investors.
Judge
Griesa ordered Argentina to help locate assets that can be seized to
fulfill judgment in these cases and if they do not cooperate the Judge
warned that he will appoint someone to supervise. Argentina up to now
has shown reluctance to cooperate. At this point, the only assets that
can be seized are those used for commercial purposes that are located
outside the country; however, the expectation is that many assets have
already been transferred. Nonetheless, some assets already under
consideration are diplomatic salaries and the Argentine frigate
Libertad. Embargos must first be presented to judge before being
executing as this is a sovereign case.
Further
delaying the embargo process is the parties disagreement as at what
point in time the assets verification should be done. Argentina is
arguing that only assets that can be verified after the first sentence
was issued should be included. The plaintiffs say it should be from
October 2001, two months before the default. The Court has not ruled on
the date yet but it has made it clear that if it discovers that
transfers were made to hide assets it would “take it as a gross act of
bad faith… and do everything in [its] power to remedy it.”
Argentina is afraid that if Plaintiffs are successful at
identifying assets it may motivate others to file suits.
Judge
Griesa also allowed a Class Action suit of Argentine bondholders to be
commenced. Argentina lost the argument that allowing these suit would
dissuade them from participating in negotiations with Argentina and
Argentina could eventually be responsible for repaying all the bonds.
As result of these suits, the government has resolved to watch more carefully vulture funds, to prevent future problems, especially where in many cases these funds managed to receive sentences in their favor after the country had already worked out a restructuring plan.
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Former Argentine President and current head of Mercosur, Duhalde, went to India to sign a framework agreement with India for Mercosur. The initial agreement establishes between 600 and 1200 products that will have preferential tariff treatment, paving the way for an eventual free trade agreement. It is the first agreement of the kind realized by Argentina outside of Latin America. Argentina mainly exports oils, minerals, vegetables, leather and some iron and steel products to India.
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The Free Trade Agreement between EU and Mercosur is expected sometime to be completed by year end. This year the two blocks will continue to discuss the opening of the European agricultural market and the opening of government purchases bids by Mercosur.
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As for the Free Trade Agreement of the Americas, another meeting is currently underway in Mexico as the Americas continue to take the first steps towards finalizing the agreement. Mercosur is worried about how much power US will try to exert this round as a number of countries have already signed bilateral trade agreements with the US since the last meeting. Subsidies are still a major sticking point. Mercosur wants them all eliminated and the US says an substantial amount. Recently the WTO has made some criticism of US subsidies and tariffs meant to protect steel, textiles and clothing industry but the US is still reluctant. On another point, Mercosur, rejects the US proposal to have investment disputes heard outside local courts.
Argentina
recently amended their Patent Law as a result of negotiations with the
US after they filed a complaint with the WTO complaining about
Argentina’s lack of protection for pharmaceutical patents. Upon
further analysis of the modification they were agreed to by Argentina,
its is evident that many of the changes were unnecessary,
and erode the rights of patent holders, not to mention violate
the constitution and the TRIPS treaty.
One
of the most important changes was to the right of a judge to issue a
preliminary injunction on the use and exploitation of the patent until a
final judgment is entered. The new article limits the circumstances
under which a judge can issue an injunction by prohibiting the
injunction if the damages suffered by the defendant as a result of the
injunction are greater than the damages to the patent holder if no
injunction was issued. This appears to be a very arbitrary standard and
is not necessary since the defendant is already protected by the
requirement of a quick and fast resolution and the ability of the judge
to require the party requesting the injunction to make a deposit in
guarantee. Also judges are now required to appoint an expert to
determine whether there is probability that
patent is being infringed or whether it could be declared invalid
impeding a quick decision of the judge.
Another important change was to the burden of proof. Normally in patent process cases, the burden is on the defendant to show that his product was obtained using a different process than the patented process. The amended article alters the burden by reverting it back to the Plaintiff if the product is not new. This opens up a whole new problem of determining what is a new product.
A
major issue on President Kirchner’s agenda is the negotiation with
public service companies regarding the increase in utility rates which,
with a few exceptions, have been frozen since 2002. Many public service
companies are foreign owned and are indebted in dollars. The inability
to raise rates has strained their ability to make needed investments.
However, the government froze rates to protect a larger percentage of
its population from passing the poverty line.
As a result of this two year freeze on rates many companies have initiated arbitration proceedings against Argentina in the International Centre for Settlement of Investment Disputes (ICSID). The suits are based on violation of bilateral investment treaties which provides for the necessary consent to ICSID arbitrations. At this point there are over 25 cases that have been file but many are still in their beginning stages. Argentina has been trying to convince the companies to drop the suits in exchange for the opportunity to negotiate directly with the government. In the meantime, Argentina continues to unsuccessfully dispute the jurisdiction of the ICSID.
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In 2003 inflation in Buenos Aires was 3.7%, according to Argentine Statistics and Census Institute. With housing and basic services experiencing the biggest increase. Inflation for this year expected to be between 8-10%, pending utility rate increase and medical insurance increases.
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In 2003 Mercosur exports where 9.1% higher than 2002. Brazil increased exports by 94% to Argentina. Argentina increased overall exports by 15.2%.
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Economy grew by 8% last year, surpassing many expectations. however, per capita income is still a lot lower than before. Argentina plans to use surplus for reactivating economy. This year economy is expected to grow less.
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Bankruptcies in 2003 where 54% more than in 2002 mostly due to finalizations of requests for bankruptcy made in 2002.
The information given in this bulletin is for general purposes only. It does not aim to provide comprehensive legal advice on any issue. If you wish to obtain specific advice or further information, please get in touch with your regular G. BREUER contact, or contact us at
G. BREUER
25 de mayo 460
(C1002ABJ) Buenos Aires
Argentina
Tel: +54 11 4313-8100
Fax: +54 11 4313-8180
E-mail: info@gbreuer.com.ar