Banking on Argentina
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Transcript of Banking on Argentina
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PRESENTATIONONTHE
CASEOFBANKINGONARGENTINA
Subject : International Business
Presented by:
Sandeep Puri 68
Pankaj Sabhaya 82
Sonam Parmar 83Dharmilk Kariya85
Mehek Desai 91
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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 $9.5 billion annually.
Political Perplexities and Monetary Problem:In March 2002, the new president
Eduardo Duhalde imposed new restriction on theforeign exchange market.
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CONTI
Dulhade closed all banks for a week toimprove the economy.
Argentina sought help from the international
monetary fund to repaired its economy.Dulhade started criticizing foreign-owned
banks, such as HSBC, for not infusing morecash into the system from theirheadquarters.
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THE PESOCRISIS
-This crisis arises due to the more printing of pesos.
- It lead to high inflation and freezing of bank deposits.
- In the aera of Nestor kirchner-new president of Argentina peso
had been delinked from dollar due to this economy of Argentina
was recover.
- But, the negative effect of delinking peso from dollar was
devaluation of peso. And peso fell from 0.9920 to 3.39/ dollar($).
- 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.
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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.
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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.
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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.
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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
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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.
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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
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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
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QUESTION
How has the fall in the value of the pesoaffected business opportunities forcompanies doing business in Argentina and inexporting and importing?
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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
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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
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QUESTION
Should HSBC invest more in its
operations in Argentina ? What
factors should they monitor as theymake their decision?
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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
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CONTI
HSBC should also consider the
depreciation of peso
Depression
External obligations of the bank
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