Argentina. In January 2002, the government of Argentina broke away from its currency board system that had tied the peso to the U.S. dollar and devalued the peso from APs 1.0000/$ to APs 1.4000/$. This caused some Argentine firms with dollar-denominated debt to go bankrupt. Should a U.S. or European parent in good financial health “rescue” its Argentine subsidiary that would otherwise go bankrupt because of the inept nature of Argentine political and economic management in the four or five years prior to January 2002? Assume the parent has not entered into a formal agreement to guarantee the debt of its Argentine subsidiary.
A close analysis of the Argentina currency crisis shows that the economy suffered from a combination of external and internal shocks. The economy was unable to adapt to changes happening in the international market. The crisis shows that exchange rate arrangements can never serve as substitutes for effective and logical macroeconomic policy. The devaluation was inevitable as soon as domestic and foreign investors started figuring out that the fiscal policies of the country were ineffective and unsound. Companies operating in the domestic market were inevitably heading towards bankruptcy. Multinational corporations operate in multiple countries, which adopt dissimilar macroeconomic policies (Madura, 2014). As such, the U.S or European parent company would inevitably have subsidiaries in Argentina as well as other parts of the world.
Multinational corporations must address financial issues effectively to create shareholder and stakeholder confidence (Shapiro, 2013). As such, major stakeholders in the international financial system would undoubtedly follow the actions of multinational corporations and investors with subsidiaries in economies experiencing such struggles. The objective is to determine the credit rating of the parent company or investor. The parent company that opts to abandon the foreign subsidiary in the crisis-hit the Argentinian economy would damage its credit rating in the international markets. On the other hand, a parent company that opts to bail out or “rescue” the subsidiary bound for bankruptcy would strengthen its credit rating. Therefore, the U.S or European parent company should not abandon the Argentinian subsidiary unless if the host nation decides to expropriate the subsidiary.
Madura, J. (2014). International Financial Management (12th ed.). Boston: Cengage Learning.
Shapiro, A. C. (2013). Multinational Financial Management (10th ed.). Hoboken: Wiley.
by EssayRoyal, Dec. 8, 2019, 6:35 p.m.