Economy & Trade, Headlines, Latin America & the Caribbean

ECONOMY-ARGENTINA: The Battle that Lies Ahead

Marcela Valente

BUENOS AIRES, Apr 11 2005 (IPS) - Now that Argentina’s debt restructuring process is nearly complete, the government is turning its attention more fully to the claims filed by foreign companies that are suing over damages caused by the early 2002 devaluation of the peso.

A total of 62 suits have been brought before the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) by companies that invested in Argentina during the 1990s wave of privatisations.

The total amount sought by those companies that have specified the indemnification they are seeking is 18 billion dollars. However, the actual figure could be much higher if claims for which no money value has been set are included.

National Treasury prosecutors estimate that the claims would actually run to around 80 billion dollars, an amount similar to the public-sector foreign debt that Argentina defaulted on during the late 2001 economic collapse, which was recently restructured in a debt swap.

The foreign corporations in question were granted public service contracts in the 1990s. The government of centre-left President Néstor Kirchner is pressing them to drop their claims, while it renegotiates around 30 contracts, allowing the companies to raise utility rates, for example.

But several lawmakers have proposed new mechanisms aimed at bringing the cases to a halt. One initiative would demand that the companies withdraw their claims as a condition for renegotiating contracts with the state.

Another would reassert national jurisdiction, to allow international dispute settlement rulings to be appealed in local courts.

In an interview with IPS, economist Leonardo Stanley with the Centre for Studies on the State and Society (CEDES), a multidisciplinary non-governmental institution that focuses on the study of social, political, and economic problems in Argentina and Latin America as a whole, said the claims have been filed with ICSID to "threaten" the government and pressure it to renegotiate the contracts under terms favourable to the foreign investors.

Stanley is the author of the study "Bilateral Investment Accords and Claims Before International Tribunals: the Recent Argentine Experience", published in late 2004 by the Economic Commission for Latin America and the Caribbean.

The report concludes that only those companies that plan to continue operating in the country will withdraw their disputes.

So far, only two firms have announced their decision to do so: Gas Natural, belonging to Spanish oil giant Repsol-YPF, which had not set a specific amount in damages; and the U.S. oil company Pioneer Natural Resource, which was suing for 80 million dollars in compensation.

The Spanish consortium said it had decided not to press the matter "in order to arrive shortly at a fair and reasonable agreement to renegotiate the contract" with the Argentine state. But its partner in the distribution of natural gas, the U.S. firm LG&E, is still suing for 268 million dollars.

Other Spanish companies are pressing ahead with their claims, such as Telefónica, which is demanding nearly three billion dollars in compensation; the Endesa power company, which is seeking 1.8 billion dollars; and Aguas de Barcelona, a shareholder in Aguas Argentinas, which is pushing for a 1.7 billion dollar award.

The Argentine state accepted the principle of international arbitration, under the bilateral investment treaties signed by the government of Carlos Menem (1989-1999). The agreements protect investment and provide for binding international arbitration of disputes that cannot be settled through negotiation and amicable agreements.

The companies that have brought the claims gained concessions for providing public services during the privatisation process led by Menem, who like Kirchner belonged to the Justicialista (Peronist) Party (although the two leaders are at different ends of the political spectrum).

Other steps taken by the Menem administration in the early 1990s were the creation of a currency board (the "convertibility" law) that pegged the Argentine peso to the U.S. dollar for 11 years, the opening up and deregulation of the economy, and a reduction in import tariffs.

In addition, investment agreements were signed with more than 50 countries.

By the late 1990s, ICSID, which had only registered around one international arbitration claim per year since its creation, began to receive one a month on average. But after the convertibility law was repealed in early 2002 by the interim government of Eduardo Duhalde (2001-2003), the trickle of claims against Argentina turned into a flood.

Under an "economic emergency law", the government devalued the peso, while bank accounts in dollars were forcibly converted to pesos, and the rates charged by the privatised public utilities were frozen.

Under the agreements that foreign telephone, gas, water and power companies signed with the Argentine state, rates were indexed to the dollar and were to be periodically adjusted in accordance with U.S. inflation.

However, against a backdrop of economic and social collapse, and with a more than 70 percent depreciation of the local currency, these conditions were impossible to maintain.

The foreign firms thus began to turn en masse to ICSID, and now claims against Argentina by corporations seeking reparations for damages caused by the inability to hike utility rates make up more than half of the claims brought before the World Bank body.

But obtaining awards through ICSID does not look like a simple task. The dispute settlement body does not have permanent members, but sets up ad hoc panels for each case. Nor do its decisions set legal precedent.

Thus, the ad hoc panels can hand down simultaneous but contradictory decisions on similar cases against the same country.

According to Stanley, during the privatisation process of the 1990s, Argentina failed to analyse the potential costs of the commitments undertaken in the event of a crisis of the magnitude of the one that broke out in late 2001, which, he said, is why the process should be kept at the level of negotiations rather than litigation.

"The challenge now is to come up with a solution that, taking into account the legal and economic viewpoints of the companies as well as the state, would be viable for both sides," without the need for international arbitration, said the economist. That is what Argentina and some of the transnational corporations in question are attempting to do now.

After taking office in May 2003, the Kirchner administration first focused on stabilising the economy, and later on renegotiating the foreign debt. Three years after the default, 76 percent of the bondholders accepted the recent debt swap.

The Argentine government has now turned its attention to the claims brought by the privatised utilities, before ICSID begins to hand down decisions. The proposals put forth by the administration and Congress are being debated this month.

Justice Minister Horacio Rosatti argues that a new law is not needed in order to reassert that concession contracts are subject to local laws and courts, and that international arbitral awards can be submitted to judicial review by local courts.

The minister is in favour of a bill that would require that the companies withdraw their arbitration claims as a condition for renegotiating their contracts.