Banking on Argentina

7/29/2019 Banking on Argentina

1/26

PRESENTATIONONTHE

CASEOFBANKINGONARGENTINA

Subject : International Business

Presented by:

Sandeep Puri 68

Pankaj Sabhaya 82

Sonam Parmar 83Dharmilk Kariya85

Mehek Desai 91


2/26

INTRODUCTION

London based Hong

Kong And ShanghaiBanking Corporation

Limited was establishedin 1865.

Until the 20th centuryHSBC bank set up theirbranches inChina,India,Japan,Europe, and North America.


3/26

FOREIGN EXCHANGE TRADING

Foreign exchange is moneydenominated in currency ofanother nation or group ofnations.

HSBC trades foreign exchangeworld wide in 60 countries andterritories.

HSBC is holding number one

position for trading ChineseYuan.


4/26

ACQUISITIONSAND DIVERSIFICATION

After world war ||, HSBC bank expanded and diversifiedits business.

HSBC now has over 10,000 offices in 83 countries andstock market listings in London , New York and Paris.

Its main lines of business are

Personal banking

Corporate investment banking

Foreign exchange operations

Private banking


5/26

HSBC IN ARGENTINA

HSBCs entry into Argentina began in 1997.

Along with the banking , HSBC bought into ageneral insurance agency with the purchase ofRoberts.

In 1994 HSBC united with New York Life to form alife and retirement insurance company.

In 1998, the bank had a loss of $13 million butearned a profit of $67 million in 1999.


6/26

ECONOMIC HISTORY OF ARGENTINATo understand the problem facing HSBC inArgentina We must know about Economic historyof Argentina.

Economy Flourished in the beginning of the20th century.

The Annual growth rate was 5% for 3 year.

So it attracted a flood of British and Spanishcapital and was rated as one of the Worlds 10richest countries even a head of Franc andGermany.


7/26

CONTI.

The Juan Peron who ruled the Argentinafrom 1946 to 1955.

Juan Peron instituted protectionist

measures and printed money to financegenerous benefits for workers.

Because of poor productivity and structuralweakness in the economy the inflation

plagued the country as well as country losttrust in the peso and invested in U.S. dollarsor shipped their capital abroad.


8/26

THE ADVENTOFTHE CURRENCY BOARDINARGENTINA

In 1989 Carlos Mennen took control of the countryand set out to implement free market reforms andrestructure monetary and economic policies.

He privatized many state-run companies ,tightenedmanagement and opened up the countrys bordersto trade.

He was also established important policy of theconvertibility Law which pegged the Argentina peso

1:1 with the U.S. dollar and restrict the money supplyto its hard dollar currency reserved.

The objective of to established currency board wasto impose discipline on the central bank.


9/26

CONTI. Success:

Because of currency board theinflation rate was reduced to 0 percent and alsoattracted to investment.

Real GDP grew by 6.1 percent from 1991 to1997 compared with 0.2% from 1975 to 1990.

Shortcoming:

In spite of these positivedevelopment the currency board also had its

drawback and it reduced the ArgentineGovernments ability to respond to external shocksby allowing its exchange rate and monetary policyto determined de facto by the U.S.


10/26

CONTI.

The Burden Of Debt:The burden of debt of Argentinagovernments

was also increased.

The budget went from a surplus of 1.2% in 1993to a deficit of 2.4% in 2000 ,the amount ofinterest rate payments increased from $2.5billion to $9.5 billion annually.

Political Perplexities and Monetary Problem:In March 2002, the new president

Eduardo Duhalde imposed new restriction on theforeign exchange market.


11/26

CONTI

Dulhade closed all banks for a week toimprove the economy.

Argentina sought help from the international

monetary fund to repaired its economy.Dulhade started criticizing foreign-owned

banks, such as HSBC, for not infusing morecash into the system from theirheadquarters.


12/26

THE PESOCRISIS

-This crisis arises due to the more printing of pesos.

- It lead to high inflation and freezing of bank deposits.

- In the aera of Nestor kirchner-new president of Argentina peso

had been delinked from dollar due to this economy of Argentina

was recover.

- But, the negative effect of delinking peso from dollar was

devaluation of peso. And peso fell from 0.9920 to 3.39/ dollar($).

- Today also the peso is nearly 70 % cheaper against the dollar

than it was in the 1990s .

- The devaluation has also resulted in new foreign direct

investment and increased business with Brazil.


13/26

NEGOTIATIONWITHTHE IMF

- Argentina was heavily under burden of the debt to privatecreditors and IMF (International Monetary Fund).

- Argentina denies to repay debt payment to IMF and world bank

as there was a disagreement between Argentina and IMF on

condition of IMF Aid.- After the 4 months negotiation Argentina was ready to pay

interest only on $21 billion over 3 years.

- In February 2005, Argentina closed on the biggest dept

restructuring in the history and had return of 70 % of NPV ofgovernment bonds.

- Argentina has debts worth 75% of its annual output.


14/26

HSBC REACTION

- HSBCs reaction to the crisis was not different to

that of other banks in country.

- Due to devaluation in Peso HSBC lost $977

million in 2001 late in America which was near3 times to its profit in 2000.

- HSBCs bad debt was doubled and pretax profit

failed by 14% in 2001.


15/26

PROBLEMIN PESIFICATION

- Pesification means conversion of $(dollar) loan into

Pesos.

- HSBC did not accept loan repayment in Pesos which

were not covered by Pesification.

- HSBC has remained in Argentina throughout the

financial crisis and it has also paid its external

obligation.

- After the crisis HSBC has not infused new capital in

Argentina even though Argentina subsidiary of HSBC

earned Profits of $48 and $56 million in 2003 and 2004

respectively.


16/26

Que. Major factors that caused the

peso to fall in value against the dollar:

huge amounts of dollar denominated debt

Exports down , GDP down, high debt

Poverty, recession, inflation

Lack of proper discipline

Issues of financial crises from brazil

Labor market inflexibility


17/26

Government done to reverse

The recession : Concretionary policies

Convertibility law that linked the peso to the U.S. Dollar at

parity.

Positive economic effects

Drop in the inflation

Inporcurement of Foreign investment.


18/26

Que. Argentinas experience with the

IMF :

focused on implementation of the program

regard to the decision to commit IMF resources

Good approach by respecting the decisions of

authorities

Funds use of its seal of approval

Help in restructuring of financial economy


19/26

IMF : helpful or not ?

IMF was obviously Helpful

Up liftment of Argentinas economy

No imposement of other conditions

Spending & production

Pulled economy out of depression

States demand of Argentine government


20/26

QUESTION

How has the fall in the value of the pesoaffected business opportunities forcompanies doing business in Argentina and inexporting and importing?


21/26

ANSWER:

Argentine govt. established Convertibility Law

which fasten the Argentine peso 1:1 with the US

dollar

Restricted the money supply to its currency reserve

It reduced the Argentine govt.s ability to berespond to external crisis


22/26

CONTI

It creates risk margin for investing in Argentina

Investors got nervous about in general and pulledinvestment out

So then country had to increased exports andinvestment

It leads to exports of farm product and othercommodities

Due to lack of investment Argentina had to importsome necessary products


23/26

QUESTION

Should HSBC invest more in its

operations in Argentina ? What

factors should they monitor as theymake their decision?


24/26

ANSWER:

HSBC should not invest more money in itsoperations in Argentina

And should operate on funds generated in

ArgentinaTo recover the loss accrued in the past

years

HSBC should rethink loansTo think if the political and economic

instability is worth the risk of continued

operations


25/26

CONTI

HSBC should also consider the

depreciation of peso

Depression

External obligations of the bank


26/26

Documents

Banking on Argentina