Fernando de la Rua, the victor in the recent Argentinean presidential election, will soon have to address the contentious reform of 1988's Coparticipation Law, which stands at the heart of securitization deals for Argentina's provinces.
Under the Coparticipation Law, the federal government transfers more than half of certain coparticipable or "revenue-sharing" taxes to the provinces. On average, these transfers account for 60% of provincial revenues, though some provinces depend on transfers for as much as 90% of their total revenues.
Since 1997 and mainly due to the high interest rates on bank loans, provinces such as Tucuman and Santiago del Estero have securitized their coparticipation tax-revenues in order to refinance existing debt.
Official drafts amending the Coparticipation Law are currently under discussion among the governors and the Ministry of Economy. The proposed amendments range from an overhaul of the law to a cap on the financing and some debt restructuring.
Some sources suggested that an overhaul of the tax system, combined with the generally poor state of some provinces' finances, could affect outstanding securitizations backed by coparticipation tax-revenues. Others feel that these fears are overblown.
"The amount of coparticipation taxes transferred to the provinces are set-in stone," said Gersan Zurita, head of public finance at Duff & Phelps. "They were established by verbal agreements between the provincial authorities and the federal government. So the political consequences of any reductions in the transfers could bring about severe consequences that no government is likely to want."
Indeed, the law is so politically charged that despite a constitutional mandate to amend it the Menem administration had still to make changes by the time of the election. Moreover, it remains unclear whether a new bill will be introduced to the senate prior to the administrative changeover on December 10.
Besides the fact that the provinces' representatives in the senate are likely to block any attempt to reduce their share of national tax-revenues, there is the question of whether the federal government would ever let a province default, given the consequences for the country's credit standing.
"All deals issued in dollars have to be approved by the government and banks will mention that as a strengthening element when they promote the transactions," said a source familiar with the deals for Tucuman and Santiago del Estero. "As a result, though the federal government would not bear legal responsibility if a province defaults on a deal backed by coparticipation taxes, its will reflect badly on its image."
According to Zurita, the real risk associated with the coparticipation ABS deals is the possibility of amendments to the 1994 Argentine Constitution that mandates a new co-participation regime, but one that cannot reduce the peso flows to the provinces. "We believe that the current changes will not affect the cash flows to the provinces and will modernize the coparticipation law. That could have a positive effect on the outstanding securitizations and add safety to the deals' structures," he said.