Summary of the Case Study
Profits at the global banking group HSBC have fallen after it made provisions of more than $1.1 billion to cover losses from the economic crisis in Argentina. The Argentine crisis accounted for $1.12 billion of the write-down - which was slightly higher than analysts had forecast. The figures were in line with analysts' expectations and this helped push shares in HSBC 59p higher to close at 837p. Last year Argentina descended into chaos as people protested against draconian policies introduced to try and avoid default on overseas debt and devaluation of the peso. Eventually the pressures became too strong, and Argentina defaulted on its debts and floated the peso against the dollar. HSBC took a $520m charge to cover losses stemming from the change in value of the peso, and a general provision of $600m for losses in Argentina. Concerns about HSBC's exposure to the crisis in Argentina came to the fore yesterday as it emerged that its investment banking arm was preparing to lower its profits forecast for the company. HSBC Group's 2001 results, notably the economic crisis in Argentina and the related devaluation of the peso by the government which forced HSBC to book a US$1.12 billion charge. Argentina has been a major disappointment foe HSBC and they have a very talented team and all the necessary elements for success in a stabilised economy to have a profitable business. Nevertheless, the situation in Argentina remains both fluid and disturbing. The Argentine monetary collapse in 2001 was devastating to the economy and to a large number of Argentine citizens. Their currency was pegged to the U.S. dollar, 1-to-1, but sank to 3-to-1 after the collapse. The resulting loan default, naturally, created a firestorm in the global financial community. The fine print to all this, however, is that, in Argentina, like everywhere it seems, the rich got richer and the poor got one hell of a lot poorer. Of course, the sanctimonious world press, smelling blood, rushed in. At least there was some, albeit grudging, admission of IMF culpability but, as one could predict, not for the right. Argentina's government won a respite from its mounting economic crisis last night as fears that the peso would go into freefall in its first day of trading against the dollar for a decade proved unfounded. After opening at about $2.20, the peso staged a rally in afternoon trading, breaking through $1.90, and raising hopes that the government's gamble on floating the currency would pay off. Developments in Argentina in the past few days are sad. The economic fundamentals are a basket case -- the nature of the country's problem is not so much a currency issue, but a major fiscal and debt problem. Exports account for a small proportion of Argentina's GDP, and even if the currency depreciates significantly, it is debatable how far this would help the economy. There's a big hitch, however: The government, having defaulted on $143 billion in debt, has no standing to issue new paper. And its bid for a $20 billion rescue package from the International Monetary Fund, which could be used to back a bond issue, is stalled. The IMF wants to see the government implement a bare-bones budget and get a grip on the money supply before it puts up more. From an investor’s point of view, some mistakes, such as fiddling inflation figures, which the national statistics agency has been accused of doing in recent months, are too big to forgive. Investors also hope that finally an action plan to tackle the energy shortage is being developed. Bankers and companies realize that this problem is likely to be solved by a combination of foreign investment with local management. But the foreign investment is not going to flow into large-scale, five-year to 10-year projects. This is also penalizing Argentine money that was moved offshore just before the crisis '' now these funds can’t return easily, and so aren’t returning. Despite Argentina growing at an average...
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