The Death of an Economy – Argentina’s Story By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

October 23, 2015 | Posted by bobbysrinivasan << back to blog

Argentina is a country with nearly 41 million people with a GDP per capita of around 15000 US dollars and a land size of 1.1 million square miles. Its economy is in deep trouble. It is currently having a foreign reserve of 30 plus billion dollars (33 billion US dollars) and it has an immediate payment of 6.7 billion this week (October 20, 2015). This reserve includes $ 11 billion that they received as a currency swap with China. The country has already spent this money and is looking to receive an additional 2 billion from China. Even though this bill will be paid, their foreign reserves are expected to fall to 9 billion US by the end of the year excluding the swap. This is a conversation between a student and his professor.

Student: Can a country go bankrupt?

Professor: Good question and very relevant in to-days economic environment. Yes, it is very possible that a country could go bankrupt. For example, a country an emerging economy has borrowed heavily from the international banks, IMF, World Bank for both its infrastructure development as well to meet its import bills (operating expenditure). Come due date, if the country is not able to honor its debt commitment in a foreign currency (Ex. US dollar) then like a corporation it could find its debt obligation being restructured. Argentina is a classic case. Few years ago it came close to bankruptcy but the loans were restructured. Some parts of the loan were written off, but still the large debt obligation remains. The creditors to the country will impose severe austerity measures in order that the country uses most of its foreign exchange earnings to pay off debt.

Student: Besides Argentina, are there other countries in this situation either currently or in the past?

Professor: Yes. After the Second World War the German Reich mark became a worthless currency and they had to pay massive reparations. Finally the reparations were written off. Currently there is a currency war waging. All countries including China are in this game. The countries involved intentionally allow their currency value to depreciate against the US dollar in order to gain trading advantage.

Student: How does India fare in this game?

Professor: Don’t worry. India has adequate foreign reserves of around US $ 350 billion which includes both gold and SDR. It has been attracting good amounts of FDI and FII. But bear in mind. We have a liability of nearly $ 500 billion against this reserve. Our reserves are not earned (equity) but borrowed (debt) money. We have over 200 billion of external commercial borrowing and nearly 300 billion FII money being employed in the stock and bond market. We don’t have cash squeeze. No speculators can hit our currency easily. RBI has sufficient financial power to regulate the value of rupee. It is currently trading in a small range of Rs.64-66 to a dollar.

Student: How will Argentina deal with this situation?

Professor: Argentina is a sad case. It used to have its currency at 1 Argentinian Peso equal to 1 US dollar. Currently it is over 10 Pesos to a dollar. Infact, in the grey market it is trading over 20 to the dollar. When a country’s currency is decimated, the standard of living in the country goes for a loss. This happened in the Far East when for example, Thai Baht dropped from 25 to 56 to a dollar. We are currently entering a period of serious economic deflation. The aggregate demand in the global economy is falling far short of the aggregate supply. All countries will be affected one way or another. For example, the commodity prices of the iron ore, copper have dropped 60-70%. The countries involved in the production of them will face severe export revenue loss. Finally, times are different. Challenges are many and the leaders of the world must get together to address this monster in the offing namely the deflation.

Student: Thank you, Professor.

<< back to blog

About Us

TERM ZERO

Media

Rankings

Accreditations

NIRF

Campus

Blog

Annual Events

Full Time Programs

PGPM

PGDM

EXECUTIVE EDUCATION

Corporate Programs

PGXPM

PGPM Flex

MBA in Business Analytics

Family Enterprises Management

Ranked 6 ^th

Faculty

Research

Centers of Excellence

Conferences

Campus Recruitment

Internships

Placement Reports

Leadership Series

Talent Listings

Ranked 6 th

Ranked 6 ^th