Dear Clients & Friends,

We are sending to you the monthly edition of our Newsletter where you will find an update on:

• Political News

• Economic News

• Legal News

• G. Breuer's News

Please do not hesitate to contact partners Jorge Otamendi and Diego Fissore for any specific question you may have after reading it or for any other issue you may need advise on.

Hoping you had a Merry Christmas, we wish you all the best for this New Year.

Best regards,

G. Breuer

25 de Mayo 460

Buenos Aires - Argentina

Tel: +54 11 4313 8100

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www.gbreuer.com.ar

There is very important news this month that may be an anticipation of the two coming years, in which Mrs. Kirchner’s Administration will not have majority in Congress.

In that respect, we want to point out two very significant events. One was the elections of authorities and members of commissions in Congress with the new composition. The other is the issuance of an emergency decree (ED 2010) for the use of BCRA reserves to pay private creditors of the State. The first issue is naturally political and the other indirectly so, but both are rocking the political world of Argentina and may be very influential facts in the coming years.

Last month we reported that the current administration was acting as if the results of the June 28 elections would have been different from reality and it was trying to pass legislation that would ease its two remaining years in power, and all of that prior to the change in the composition of Congress on December 10.

In that respect, this Administration managed to pass the political reform -which had been approved by the Lower House in November-. This new legislation, which we commented last month, provides for open and simultaneous primary elections in political parties, and also requires that in order for the parties to be recognized, they should count with a minimum of four per thousand of the electoral roll of the relevant jurisdiction. According to many analysts, it is clear that this Administration is trying to prepare the ground for a K candidacy for 2011, by making it difficult for small parties that may take votes from them to present candidacies and also forcing opponents in the official Justicialist Party to remain in the party. As we had said, it is still unclear whether this reform may really help the Presidential couple, since according to most polls the rejection levels that they have would be beyond electoral gimmicks.

After December 10, 127 new deputies elected in June 28 were sworn in, and thus the official party does not have an independent majority in the House, but keeps its power as first minority. In the Senate, the numbers are even tighter, since the official party counts with 32 seats, while 37 are needed to approve decisions. The opposition, all put together, has 127 seats, and then no political sector has a majority ensured. Senators not aligned with the official party or the opposition will substantially increase power. It is worth noting that the National Vice President, a staunch opponent of Mrs. Kirchner, is the president of the Senate and votes in case of ties, role that made him very popular when he voted against the Government in the tax hike against the agricultural sectors. Many more situations like that may happen in the future.

The first battle in the new Congress was given when the authorities of the House and the members of the commissions needed to be elected. The opposition, all together, has majority in the House and wanted to have the majority of members in all commissions and authorities, with the exception of the President of the House, since such authority is in line to succeed the President (the opposition respected that the official party would like to have a member of its party in the line of presidential succession).  There were intense negotiations and an agreement was reached whereby the opposition would have majorities in all commission respecting the composition of Congress, but in four commissions (Budget Committee -Presupuesto y Hacienda-; General Legislation Committee; Impeachment -Juicio Político-; and Petitions, Powers and Regulations Committee) that the EP considered very important the opposition majority would be reduced to just one member (to ease the official party to reach majority in such commissions). As to the presidencies of the commissions, the opposition would obtain all of the commissions that control the EP, and the EP the presidencies of those commissions considered “executive” by nature.

But such agreement, that showed reasonable positions and willingness to negotiate, was vetoed at the last moment, supposedly by Mr. Kirchner himself, who is a new member of the House. Then, the opposition gathered numbers to open a session without the official party, and imposed the agreement they had brokered to the official party.

That was the first political defeat for the official party in Congress for the first time in a long time and anticipates what may happen. It was a harsh and early wake-up call for the Government in the sense that political hardball this time may be used against them.

Commissions in Congress are very important, since they control what can be voted or not in the plenary sessions that convert draft legislations into laws. That is why the elections of members and authorities are so important.

The authorities’ election in Congress is indicative of what will happen in the coming years. The official party will not negotiate or will not abide by the negotiations it approves, and then a time of harsh negotiations or actual confrontations may come. To that it may be added that the official party’s high representatives said that the President would use its veto power as many times as it needs, which would be equivalent to saying that Congress is a decorative entity.

With this background in mind, we note that that Congress may start to play a very important role in matters of great importance for the country.

As we advanced, other very relevant political news of this month was that on December 14 the Government announced that it would create a fund called Bicentennial Fund for the Reduction in Debt and Stability, which would be formed by 6.57 billion US dollars of the BCRA’s reserves called “freely available”, the purpose of which would be to guarantee the payment of the financial obligations of the state with private creditors or otherwise denominated in foreign currencies. The measure was announced, and an emergency decree (ED 2010) was executed by the EP.

ED 2010/09 and the Bicentennial Fund could be considered similar to the IMF payment that took place 2005, when Argentina paid its debt with the IMF; however, there are important differences. First, BCRA reserves were used to pay the IMF debt, which is an international organization. And also, the emergency decree at that time (No. 1599/2005) was very promptly ratified by a law, that is to say Congress, at that time controlled by the official party.

It needs to be said that the BCRA’s autonomy is stated both in the National Constitution and in the BCRA’s chart (24.144), and ED 2010 would be, at least according to many analysts, erasing that autonomy completely, providing very good arguments to those who say that the Executive Power controls the BCRA. Also, the ED is said by many to be not “urgent” since the funds to pay such debt were provided for in the National Budget.

Now, the opposition party is trying -politically and judicially- to deprive ED 2010 of effect since they consider that Central Bank’s funds should be used for purposes other than political and, eventually, Congress should decide about the destination of the Central Bank’s reserves. In that respect, opposition members of Congress sent a letter to the Central Bank’s president, who now asked the opinion of the Central Bank’s legal unit. No such opinion was known yet, and a provincial jurisdiction, requested the Supreme Court to stay such use of reserves.

As it is possible to see, the future of ED 2010 it is still uncertain, but the way in which this decree was handled so far and what ends up happening with it tells and will tell a lot about what can be expected politically in the coming years of Argentina. It is evident that a Government that does not interact with the opposition in a matter as important as using Central Bank’s reserves to pay its debt is ready to run without regard to opposition. And such opposition now represents much more than half of the population.

It is also evident that a Government that resorts to Central Bank’s reserves is in need of funds, or that its expansive populist policies are consuming all the ordinary -and extraordinary- resources that Government may rely upon, and those policies will not be changed. Is that happening in Argentina?  Interesting question that the current administration denies or claims that all shortage of funds, if any, are only due the international crisis.

We point out that these days are key to the validity of ED 2010, since the bicameral commission that will have to give its opinion about it is currently being formed. Such commission is formed by 16 members, and there are 8 from the official party and 8 from the opposition (half of them belonging the Senate and the House). The opposition in the House is objecting that the official representatives are 4 since they do not have half of the members of the House. That issue may reach courts. Also, the appointment of the president of such commission is important, since in case of ties, such officer will have a decisive vote.

As said, these issues will be resolved these days and they may determine the course of the coming years in Argentina. The bicameral commission under creation is key since it will control emergency decrees that may be the resort that the current administration may use if Congress is too hostile.

In the meantime, the relationship between the Government and other sectors of society is not improving at all. We mention other factors that may have political relevance from now on.

The farm conflict is still unresolved, and talks of a new strike are heard. New fronts on this field are being opened and accusations by the Government come easy every time that there is a problem touching the sector. Now, this Administration accuses the farming sectors for opening illegal canals that caused massive flooding in the Province of Buenos Aires.

The war with the media continues. Three judges decided to stay the New Media Law for different reasons, and this legislation is a clear example of the implementation problems that this Administration has when it wants to enforce the fast track legislation that it imposed in the last month. The speed with which they were approved made that they leave too many open fields that the courts then point out.

We also would like to mention that the Presidential couple was being investigated because of the impressive increase in their patrimonial estates -158% in 2008 with respect to 2007-. A highly questioned federal judge dismissed the case based on a much questioned analysis issued by an Accounting Body of the Supreme Court. This accounting body is accused of not being reliable and is currently under restructuring by the Supreme Court. Curiously enough, the judicial officers in charge of appealing such ruling did not do it, so the dismissal of the case could be res judicata. No need of more comments on this front.

As it is possible to see, this month has been very active politically in Argentina and the coming month may also be, despite that the holiday season officially starts in Argentina.

The news to come may involve political decisions reviewed by courts, so the tense relationship between courts and the Government should be closely followed up. It is not in vain that the opposition parties have on top of their agenda the amendment of the Council of Magistrates, which is the organ that decides appointments or removals of judicial officers.  Now, the Government can block decisions in that organ.

Let’s hope, as usual that all turns out for the good of the country.

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Economic News

In the economy field, it was very important that the Government took the legal steps to reopen the debt swaps with holdouts that did not enter the 2005 exchange, who are said to be of about 20 billion US dollars. In that respect, pieces of legislation were published and the presentation papers were filed with the SEC, and then presentations in Europe and Japan may follow.

Still the specific terms of the offer are not known, although the press is advancing that a security discount with a 65% principal cut would be offered to accepting holdouts, and other securities would be offered for the interest accrued since 2006. These securities may have differing maturity dates for institutional investors and for small holders. Another security for the GDP growth would be still under study.  The final terms would be known imminently.

It would be very important for the Government to close this exchange successfully, since it needs that to come back again to the international financial markets, for the internal financing may be showing signs of exhaustion.

Also  very relevant economic news that may impact the holdout exchange is the creation of the Bicentennial Fund that we comment in the political section of this work. We note that, according to many and despite the final resolution, the Bicentennial Fund may have, the main message that could be extracted from that fund would be that the Government is seeking to continue with its policies of not stopping public spending, which to many experts is too dangerous, and also it would be a clear indication that the spending will not be financing with revenues but with reserves.

On that line, Argentina’s primary budget surplus has shrunk in recent months as a slowing economy has reduced tax revenues and the Government has increased spending in an attempt to offset the slowdown.

Argentina's cash-strapped government has been borrowing heavily from state agencies to meet its financing needs, but many analysts say that such internal type of borrowing would have its limits and coming back to the international financial markets is a big need of this administration. 

As to the countries activity levels, we mention that according to economic surveyors Investigaciones Económicas Sectoriales (IES), foodstuff exports in the first nine months were 10,643, US dollars for a 13.3% fall year-on-year. Exports totaled 24.8 tons in the first nine months.

In other fields, INDEC (the official statistics office ) announced that construction activity rose 2.2% in October year-on-year, ending three months of straight downward figures. Argentina’s economy shrank for a second straight quarter from July to September, but industrial output  jumped in November as auto production surged -it jumped 32.4% -, indication of a turn in the economy.  Third-quarter gross domestic product fell 0.3% compared with the same period a year ago. However, industrial production rose 4% in November from the same month last year.

The information released by INDEC this month reports that Argentine inflation was 0.8% in November as food and clothing prices rose. This figure came below market expectations.

According to a survey conducted by Universidad Torcuato Di tella (UTDT) people’s inflation expectations for the next 12 months hit an average 33%. The figure was 3.4% above previous poll. Inflation expectations, according to UTDT, in the federal capital were stable at 20% of median responses, but hit 25% in Greater Buenos Aires and inland Argentina.

Forecasts by several analysts surveyed by Reuters gave a median forecast of 0.9% for the monthly inflation rate, with estimates ranging from 0.5% to 1.1%. Although the gap between private estates and government data has narrowed, there is still a difference between private and public estimation.

Overall, it is seen that Argentina’s economy will grow during 2010, although inflation may be a problem if not tackled appropriately. Also of importance is that the level of State spending is seen with concern. The final figures of the economy in Argentina 2009 will be given in the next report.

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Legal News

You may read the  December edition of our Boletín Informativo, G. Breuer’s monthly publication focused on general legal information sent to our Argentine clients & friends.

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For more information on local legislation, you may read the December edition of our Boletín Informativo sent to our Argentine clients & friends.

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