CASE STUDY ON
COURSE CODE - (IBS 345)
Dewan Md. Nur A Yazdani
Faculty of Business Administration
Banking on Argentina
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? Answer:
Argentina was rated as one of the world’s 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 government’s ability to respond to external shocks was severely reduced. In effect, Argentina’s exchange-rate and monetary policies were determined de facto by the United States, and Argentina’s 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, Argentina’s 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 government’s 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.
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