Pesification sneaked in Civil Code reform

By Ruben Rabanal
For the Herald

The government plans to sneak in “pesification” of contractual obligations in the midst of the crisis over dollar curbs. Two articles of the Civil and Commercial Codes unification and reform (Nos. 765 and 766 of the Civil Code) joined a further 2,600 dealing with new divorce norms, prenuptials, and even property rights in private cemeteries — all to be debated by Congress.

While it is impossible to imagine that while the whole country was hanging on whether CFK would back Deputy Edgardo Depetri’s bill to pesify contractual obligations, the President had already sent that message to Congress — in code, so to speak.

However, the articles which came to light yesterday did not extend to the debt bonds and securities which the government must redeem in dollars nor bank deposits not covered under the Civil Code. Unless this reform is to be applied retroactively. But that does not mean in future it will be easy to convince foreigners as to the safety of issuing new bonds in dollars in this country and then seeing them redeemed in the same money.

Rather more than the national government, the governors are worried over this point.

The Civil Code reform thus kicked off yesterday as a surprise package. It was still being distributed among senators and had not even reached the Constitutional Affairs Committee when the markets were buzzing with the inaccurate news that this pesification could apply to dollar bonds. Hence the sharp falls on the Stock Exchange. Indeed the debate had not even started since the above committee must first send the bill to a Bicameral Commission, which will analyse it for a simultaneous debate in both Houses.

There was nothing innocent about yesterday’s confusion — the bill includes the pesification of any contractual obligation assumed in Argentina in dollars or any other foreign currency, with the possibility of cancelling it in pesos according to the official exchange rate. Evidently this does not include bonds already issued or current deposits or futures but the wording was enough to trigger a wave of panic.

The reform sent to Congress overturns one of the few surviving articles of the Convertibility Law (1991) — No. 11. There Domingo Cavallo amended the Civil Code to introduce a bimonetary system into the country, allowing for the cancellation of contracts in the stipulated currency, dollars or whatever. So you might say this is the “cultural” end of convertibility.

Now we can understand why Cristina Kirchner never went ahead with a specific pesification bill like that presented by Depetri or Broad Progressive Front Senator Jaime Linares. The President stayed mum in the face of these Congress initiatives simply because her bill to unify the Codes already covered them.

All these bills follow the same line as the Civil Code reform in overturning the bimonetary system.

In both cases it establishes that an obligation stipulated in foreign currency transforms itself into an obligation to repay in the legal coinage, to wit pesos.

“If the obligation stipulates a currency which is not legal tender in the (Argentine) Republic, the obligation must be to consider it a sum which the debtor can repay by paying the equivalent in the legal currency,” says the new Article 765 proposed for the Civil Code which now goes before Congress.

Why, then, the panic triggered yesterday by the market? It was erroneously interpreted that the measure could be retroactively applied to meet tranches of dollar bonds, causing sharp falls.

The reality is that an article of this type, once converted into law, will apply to rent contracts, real estate purchases and, it is said, may influence future bond issues in some way. But bond issues in dollars were not an innovation of Convertibility, since Argentina incurred debt in foreign currency well before that norm — for example, the Bonex Plan imposed in exchange for bank deposits by Economy Minister Antonio Erman González in 1989-90.