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Case Chap-09

The document summarizes Argentina's peso crisis and HSBC's potential investment considerations. [1] When Argentina pegged its peso to the US dollar, its monetary policy was effectively determined by the US. A decline in commodity prices, Brazil's currency devaluation, and rising debt burdens caused economic troubles. [2] Argentina has had a mixed relationship with the IMF, though they are now working to establish long-term cooperation. [3] The falling peso caused hyperinflation and hurt companies with dollar debt loads, though it boosted export competitiveness. HSBC should monitor government actions on debt repayment before significantly increasing Argentine investments.

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Kamrul Rakib
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301 views4 pages

Case Chap-09

The document summarizes Argentina's peso crisis and HSBC's potential investment considerations. [1] When Argentina pegged its peso to the US dollar, its monetary policy was effectively determined by the US. A decline in commodity prices, Brazil's currency devaluation, and rising debt burdens caused economic troubles. [2] Argentina has had a mixed relationship with the IMF, though they are now working to establish long-term cooperation. [3] The falling peso caused hyperinflation and hurt companies with dollar debt loads, though it boosted export competitiveness. HSBC should monitor government actions on debt repayment before significantly increasing Argentine investments.

Uploaded by

Kamrul Rakib
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Case: HSBC and Peso Crisis in Argentina

Questions

1. What are the major factors that caused the peso to fall in value against the dollar? What has the government done to reverse the recession?
Ans:When the Convertibility Law pegged the Argentine peso 1:1 with the U.S. dollar, the governments ability to respond to external shocks was severely reduced. In effect, Argentinas exchange-rate and monetary policies were determined de facto by the United States, and Argentinas interest rates were determined by the U.S. Federal Reserve. When world commodity prices declined, the U.S. dollar, and hence the Argentine peso, strengthened against other currencies. Concurrently, Argentinas main trading partner, Brazil, devalued its currency. As deflation set in, both the Argentine government and many private companies found it difficult to pay their debts. Tax revenues fell, while public spending increased. Interest rates payments went primarily to overseas investors, thus further draining the economy. When Argentine banks were pressured to buy government bonds, a bank run ensued. Following the governments default on its debt, the currency board was abandoned, and the peso was allowed to float against the dollar. In the latter half of 2002, the Argentine peso was trading at about 27 cents to the dollar.

2. What has been Argentinas experience with the IMF? Has the IMF been helpful or not?
Ans:Argentina has had a somewhat tumultuous relationship with the IMF. Initially when the country sought help from the IMF, the IMF refused saying that Argentina would have to restructure its banking system, fiscal policy, and exchange rate policy. Eventually the IMF did grant loans to Argentina, but then was difficult to negotiate with when Argentina had trouble repaying those loans. The IMF and Argentina did finally agree to terms, however, and both are working to establish a long term relationship.

3.

How has the fall in the value of the peso affected business opportunities for companies doing business in Argentina and in exporting and importing?

Ans: The biggest effect of the fall in the value of the peso for companies doing business in Argentina was hyperinflation. Also, companies with dollar denominated debt were badly hurt as the cost to repay that debt escalated rapidly. The declining peso helped exporters to be more competitive but made the prices of imported goods increase faster than the prices of domestic goods.

4. Should HSBC invest more money in its operations in Argentina? What factors should they monitor as they make their decision?
Ans: HSBC should continue to be cautious in its approach to increased investment in Argentina. Although the situation appears to be stabilized, it is still potentially volatile. The company should monitor the governments actions carefully, particularly its actions regarding the repayment of foreign debt. Also, if the government requires that dollar denominated loans issued by HSBC and other banks in the past be allowed to be repaid in Pesos, HSBC should be very reluctant to issue any more dollar denominated loans.

Case study On HSBC

Submitted To: Dewan Md. Nur A yazdani Assistant professor FBA

Submitted By: Md.kamrul Islam 073200050 Salbin Akhter 073200012 Course- IBS(345) Group-02

Submission Date: 07/08/2010

Eastern University

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