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CIA-3
CASE STUDY ANALYSIS
SUBMITTED BY
AYUSH GUPTA(1520408)
CHAITANYA SUMBE(1520409)
CHETAN R. BAGRI(1520410)
the peso began a period of depreciation, eventually settling around 3.5 (see exhibit
2).
Exhibit 1: Inflation in Argentina, 1980 - 2001
CASE ANALYSIS
Argentina was rated as one of the worlds 10 richest countries in the beginning of the
twentieth century. But in 1980s inflation plagued the country and as a result
Argentina lost trust in the peso and invested in U.S. dollars and shipping their capital
abroad. To solve this carols Menem in 1989 took control of the country and set out to
implement free market reform and to restructure monetary and economic policies
.He tightened fiscal management and also established the convertibility law which
pegged the Argentine peso 1:1 with the U.S. dollar, but the governments ability to
respond to external shocks was severely reduced. In effect, Argentinas exchangerate 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.
1) What has been Argentinas experience with the IMF? Has the IMF been
helpful or not?
Answer
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. Argentina allow to pay
interest only on $ 21 billion debt over the next three years to repay most of the debt,
including overdue interest, Argentina proposed a plan to its creditors asking them to
write off 70 percent of the present net value of their government bonds .The IMF
and Argentina did finally agree to terms, this way Argentina closed on the biggest
debt restructuring in history with the help of IMF however, both are working to
establish a long term relationship.
2) How has the fall in the value of the peso affected business opportunities for
companies
Answer
The biggest effect of the fall in the value of the peso for companies doing business in
Argentina was hyperinflation. The central bank printed pesos to keep banks solvent
but this led to increase inflation. Also, companies with dollar denominated debt were
badly hurt as the cost to repay that debt escalated rapidly. In 2003 new president of
Argentina nester Kirchner economy of Argentina rebounded significantly the country
experience hyperinflation after the abandonment of the pesos peg to the dollar; the
devaluated peso is now one of the causes of the economy recovery. The pesos were
trading at 0.9920 pesos per dollar on December 31, 2001, but it fell to 3.39 pesos on
December 31, 2002. Next few years the peso is nearly 70% cheaper against the
dollar than it was in the 1990s, resulting in increased exports of farm product and
other commodities. The devaluation has also resulted in new foreign direct
investment and increased business with Brazil. The declining peso helped exporters
to be more competitive but made the prices of imported goods increase faster than
the prices of domestic goods.