A newly proposed Argentine bankruptcy law aimed at helping ailing companies may actually exacerbate investor losses on Argentine bonds, sources say.

In an attempt to save struggling companies, the government is desperately searching for a resolution to prevent an overflow of bankruptcies. The latest proposed solution is a new bankruptcy law, which, if passed, will provide banks with a 90-day period to restructure loans held with all debtors, through an agreement with each of them. The rescheduling will provide terms based on the new currency-exchange conditions and the debtors' cash flow. If at the end of this term no agreement is reached, the financial institution must make provisions for 100% of the debtor's loan.

Additionally, according to Standard & Poor's, the "exclusivity period" during which firms that have filed for reorganization proceedings (similar to filing for protection under Chapter 11 of U.S. bankruptcy law) are entitled to submit proposals to their creditors would be extended to 180 days from 30 days, and the new bill would eliminate the ceiling that a previous law set on the reduction in the original amount owed that debtors could present.

However, this easing of standards in regard to debtors' devalued loans may threaten payments to investors. "I think it's pretty clear that the law is not investor-friendly," said one portfolio manager. "But by the same token, does [Argentina] have any choices?"

Critics of the regulation say that it will do away with the possibility that some credit mechanisms might survive within the Argentine economy. In fact, the likelihood of credit being restored within the financial system was already eliminated by the decision to convert dollar-denominated deposits into devalued pesos; however, the bankruptcy law is expected to make the situation worse.

"The law itself is contradictory in a whole bunch of places, and that's really why you can't plan a strategy for it," the portfolio manager noted. "For instance, in one part it says that there is a 180-day moratorium before creditors can assert their rights or the lenders can assert their rights against creditors, and by the same token they say that companies can make payments if they have the resources. Until you see the chapter and verse of the law, nothing really makes sense."

Bad loans

In December 2001, the government imposed a moratorium on servicing its own foreign debt, and shortly thereafter, the Economic Emergency Law was implemented, bringing an end to the convertibility law, where one peso is the equivalent of one dollar. As a result, many corporations are now holding devalued loans, making their debt far more expensive, as the peso at press time was at 71 cents to the dollar, up from 49 cents to the dollar early last week.

"The new law is the attempt is to help out the corporations," said an S&P analyst. "There's just no right answer and no easy fix for this problem here. Because of the general mess in the economy these companies could never stay alive."

Under the new law, transfers abroad will be prohibited, except those related to foreign trade transactions or those that are authorized by the Central Bank. Exemptions to the restriction would apply to debt payments by exporters made directly with export proceeds, payment of financing agreements guaranteed with export flows, and loans provided or secured by multilateral credit agencies.

Furthermore, any proceedings for foreclosures on mortgages and other types of loans that were pledged to back debt, including those provided for under the Securitization Law, will be extended to 180 days, from the original 30-day period.

And the Central Bank is cutting debtors even more slack: With the new law, the Bank will eliminate restrictions or regulations that make it more difficul t or expensive for individuals or companies in bankruptcy reorganization proceedings to gain access to credit.

Also, unlike the Emergency Law that was passed earlier in the year, devalued debts will be extended to contracts between individuals outside the financial system.

"By tryng to impose this debt moratorium, the government is really causing a breach of all these debt contracts. And, everybody knows that if they do that it's going to be really hard to get anybody to invest in Argentina in the future." the analyst said."People are going to say, what good is this piece of paper that says you owe me money if you can just turn around and not pay me down the road just by a simple law change. It's just a real mess."

And it seems as though investors are in agreement with the analyst. Another Argentine investor noted that investors are bitter about the losses they have already incurred from Argentine transactions and will be less likely to invest there if and when the country is back on the right track, regardless of whether this bankruptcy law is enacted. "So much trust has been broken here and it can only get worse," the Latin American investor said. "And investors tend to have long memories."

IMF tries to help

The International Monetary Fund has publicly announced it has concerns about this new law. However, the specific concerns were not disclosed. "The problem is that there is so much going on, that pretty much everything in Argentina is a concern," said a source at the IMF.

The IMF is currently assisting Argentina in the development of a credible and sustainable economic program. In a press conference at the end of January, Thomas Dawson, a director at the IMF said, "We are working with [Argentina] to develop precisely that, and all indications are from the team that that is their goal. And from what we see, that is the direction in which they are working. We are giving them advice as we normally do, but they are going in that direction. This is not like on your computer screen, when you see how long it takes to download the program, but clearly, that is the direction in which it is going, and I think the discussions have been quite productive."

Additionally, a report released by the IMF late last month also stated, "The goals of the plan, which the IMF could support with financial assistance, are to rekindle activity, to preserve macroeconomic stability and to set the basis for growth. In this context, the IMF is already providing technical assistance in banking, budget and debt management."

What does Argentina need to get on the right track? According to the IMF source, that's the question on everyone's mind these days. "They need to come up with a comprehensive solution to their current problems, and they are significant and broad problems," the source said. "We are there to provide technical systems - we've had a number of technicians down there looking at their financial sector and their fiscal situation and obviously they are at the core of their troubles."

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