Argentina elected a new president, Mauricio Macri, on promises to boost the economy using a series of liberal economic reforms. In the run up to the election, Macri had claimed any perceived prosperity arising from the economic policies of former president

Chartered Banker MBA Programme ASB9042 International Banking

1. The due date for the assignment is the 31st March 2020

2. The word limit for this assignment is 3,500 which does not include referencing. Where an assignment exceeds the stated word limit, the following rules will apply: a. Award a mark that reflects deficiencies in the work as submitted, that is in line with explicit marking criteria and is proportionate to the extent to which the word limit is exceeded or b. Disregard work submitted above the word limit.

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6. This assignment contributes to 100% of the overall module grade.

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The International Banking assignment requires you to prepare an Analyst’s Report on Argentina. Background In 2015, Argentina elected a new president, Mauricio Macri, on promises to boost the economy using a series of liberal economic reforms. In the run up to the election, Macri had claimed any perceived prosperity arising from the economic policies of former president, Cristina Fernández de Kirchner, was fake, that her government was financially over-stretched, and the bubble would soon burst. The government of Fernández de Kirchner imposed currency controls imposed in 2011. This move kept the national currency (the peso) artificially high against the US dollar, which created a black market. Elsewhere, her government used subsidies to keep prices down. However, and with inflation accelerating and poverty rising, many market analysts considered capital controls the main culprit for an expected crisis in 2015. With prices distorted, the international financial community disbelieved official inflation and growth data; the government had stopped publishing poverty statistics. One of Macri’s first acts was to remove currency controls. The change to a floating exchange rate caused the peso to devalue by around 30%. To address record high tax rates and depleted reserves at the central bank, Macri cut export taxes and resolved a dispute of 15 years with bondholders that meant Argentina could resume access to international capital markets. While getting off to a reasonable start, rising inflation forced the central bank to raise interest rates to 25% that led to an economic contraction of 1.8% in 2016 though the economy recovered and grew by 2.9% in 2017. Notwithstanding, difficulties remain. The economy worsened in 2018 with inflation the highest of the G20, and central bank efforts to control inflation failing. International trade moved from surplus to deficit. Interest rate rises in the US caused investors to switch out of emerging markets and return home. Furthermore, higher US interest rates raised dollar values, which particularly affected Argentina. Fears of a sovereign debt crisis caused the central bank to increase interest rates to 60% but this move could not prevent the peso sinking against the dollar (the peso lost 50.5% of its value in 2018). On 8 May 2019, Macri announced Argentina would seek a loan from the IMF for $50 billion, eventually $57 billion and the largest IMF loan in history, with Macri pledging to reduce inflation and erase the primary fiscal deficit in 2019. To achieve fiscal targets, Macri’s government has cut subsidies. However, this move has fuelled inflation causing the central bank to raise its reference rate (for issuing shortterm notes) to 74%, which has choked off the already weak demand for credit from households and businesses. With a presidential election looming, investors are sceptical about the leftist Alberto Fernández and his running mate Cristina Fernández de Kirchner. Political uncertainty is causing further outflows and Argentines are facing their fifth debt default in 30 years. Argentina is in a deep recession: in H1 2019, inflation hit 22%; in Q1 2019, the economy contracted by 5.8% on top of a 2.5% contraction in 2018. Three million Argentineans entered poverty in the past year. On 11 August 2019, Macri lost a primary election: he won 32% of the vote against 48% for Alberto Fernández and Cristina Fernández de Kirchner. The value of the peso fell by 15% after Macri’s defeat in the primary. Some of the most traded stocks lost roughly half their value in a single day. On 1 September 2019, Macri announced the temporary imposition of currency controls to support the economy and shore up confidence in financial markets, ahead of the presidential election on 27 October. Under the new measures, companies must request permission from the central bank to sell pesos and buy foreign currency to make transfers abroad. Argentina made a surprise announcement that she would seek to defer payments on approximately $100 billion of foreign debt. The implied risk of default on government bonds surged past 80%. This casts doubt over the disbursement of the final tranche of the IMF loan ($5.4 billion) while some credit rating agencies were considering downgrading Argentina to junk status. The situation has weakened trust in financial institutions with many Argentines preferring to keep their dollars in the “colchón bank”, i.e., under the bed. (The $10,000 ceiling for dollar transactions is generous in comparison to previous actions, such as, the “corralito” in 2001, which stopped all withdrawals of dollars from bank accounts for a whole year.)

Your Task You should prepare an analyst’s report on Argentina from the perspective of an international bank. You may make assumptions and please ensure to state what they are in the report. For instance, you could take the perspective of an international bank subsidiary operating in Argentina; you could take the position of an international bank that lends cross-border to borrowers in Argentina; you could examine the situation from a regulatory or supervisory perspective. You should state assumptions about your bank, for example, whether it is a large or small bank, retail or wholesale oriented, universal, its home country and so forth. Your Report could include analysis on the points listed below. Each Report must start with an Executive Summary that includes a recommendation on whether or not to invest in Argentina, and states your assumptions. The Report could consider the following:

1. An economic profile of Argentina.

2. Recent financial history of Argentina.

3. Benefits and costs associated with foreign bank entry.

4. An analysis of the Argentine banking sector: regulatory and supervisory structures, competitor analysis, performance and risks etcetera.

5. An analysis of political risks in Argentina (check the news!). The charts below illustrate some of the difficulties facing Argentina.