Argentina: New Law Requires Creditors to Accept Provincial Bonds

Co-written by Pablo Germain

Originally published on 16 February, 2002

We have advised several clients doing business in the Province of Entre Ríos on recent legislation allowing the province to force acceptance of provincial treasury notes in cancellation of public and private debts. Because of the grave issues raised by the specter of Argentine provinces creating their own currency and forcing its acceptance on parties other than employees or providers of the government, we have prepared the following article outlining the issues and our response. We post this article to for informative purposes only and do not at this time have reason to anticipate that your interests in Entre Ríos will be necessarily affected by the new legislation.

One year ago, Entre Ríos issued Law No. 9359 ("T-Bond Law I") authorizing the executive branch to create instruments for the payment of public and private debts of any nature contracted by the province in carrying out its general budget and any related laws. The mandate was carried out in the form of treasury notes issued and payable at par with the peso and the U.S. dollar.

Under T-Bond Law I, the treasury notes were not deemed obligatory (i.e., the creditor was not obliged to accept them) to cancel debts other than debts incurred directly by the province. Acceptance by other persons in satisfaction of a debt remained voluntary.

On January 4, 2002, Entre Ríos issued Law No. 9382 ("T-Bond Law II"). T-Bond Law II mandatorily extends the use of the treasury notes to effectively all public and private debts, thus creating a provincial currency. As a result of T-Bond Law II, the treasury notes must be accepted in cancellation of at least "50%" of any obligation "accrued or accruing in the Province of Entre Ríos" at par with the peso. T-Bond Law II entered into effect on January 13, 2002, at which time businesses "present" in Entre Ríos must accept them as payment for obligations "incurred" in the province.

T-Bond Law II establishes fines for non-compliance, i.e., refusal to accept the treasury notes. For first-time infractions, the fine is 5,000 dollars or pesos. Second-time infractions reach 10,000 dollars or pesos, while for the third and subsequent instances, the fine equals 20,000 dollars or pesos.

We believe that T-Bond Law II violates various provisions of the Federal Constitution that reserve the right to print currency to the federal government. As a result, should your company be confronted with the threat of payment in treasury notes, we would recommend measures to enjoin enforcement of the law that include bringing an original action with the Supreme Court of Justice.

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