Globalization and Emerging Markets

Elective Course

Harvard Business School

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     Course Overview

 

The world order has changed significantly in the last two decades. The influence of western-style varieties of capitalism has been challenged by new forms of capitalism that rely less on private enterprise and on the enforcement of rigid institutional structures (e.g., laws). This change is to a large extent explained because of the rise of emerging markets to the center stage of global capitalism. Large economies such as those of BRIC countries (Brazil, Russia, India, and China) or the so-called N-11 (Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, and Vietnam) dominate some of the most important commodity markets and are growing and industrializing at a faster pace than any developed country. Additionally, investors that considered securities issued in emerging markets as a risky asset class in the 1990s are now buying emerging market bonds and stocks as the new blue chips. These trends are important because they provide a new set of opportunities for entrepreneurs and investors in the developed world and within emerging markets.

 

Some of these changes, however, have taken place so fast that it is hard for investors, entrepreneurs, and managers in general to develop a framework that can help them differentiate secular trends from temporary transitions and provide them with lessons to deal with the weak institutions, political risk, and strong state presence that prevails in emerging markets. Therefore, this course provides a simple Description: Description: BRIC and MINT emerging market investingframework to understand the development strategies followed by emerging markets, identify and learn to deal with political risk and state capitalism, and, finally, to distinguish new trends that can provide sustainable business opportunities. The course uses a variety of country and company cases to accomplish these objectives -- from country cases on BRIC economies, to cases on energy, mining, and utility companies to banks operating in emerging markets.

 

Doing business in emerging markets and interacting with the governments of those countries poses significant challenges. The business environment in these new dominant emerging markets is very different from that of the developed world. For instance, in the largest emerging markets governments play a greater role to promote economic development, the rule of law tends to be weaker and the enforcement of contracts can end up depending on the political whims of whoever is in power. Therefore, this course will have a strong focus on the strategic challenges managers face when dealing with state-owned enterprises or with governments that threaten firm performance either through expropriation, corruption, or other forms of state intervention.

 

The course will focus on three interrelated modules that affect growth and business opportunities in emerging markets. First, the course provides a basic framework to understand the development strategies and sources of competitiveness in emerging markets. Second, the course will look at the kind of strategies that succeed when investing and doing business in or with emerging markets. Finally, the third module looks at business-government relations in three different ways. The module will begin by looking at the rising challenge of developing successful strategies in systems in which corruption is pervasive. Second, we will look at the importance of state-owned enterprises in emerging markets and the possible risks and business opportunities that they may bring. Finally, the module includes a series of cases that examine strategies for companies and investors to help them overcome expropriation risk. 

 

Below, you will find an overview of the course in module form. Each class period is guided by a module including the cases, assignments and links to the information used for that specific class.

MODULE 1 The Competitive Advantage in Emerging Markets

Session One - China: “Unbalanced”

§  Case(s):

·   China “Unbalanced” – 711.010

·   China and the Yuan-Dollar Exchange Rate – 711.110

§  Abstract: In 2010, Wen Jiabao looked back at the financial crisis with some satisfaction. Using aggressive fiscal and monetary policy, China had weathered the crisis successfully, growing 8.7 percent annually in 2010. Most of the unemployed workers had returned to work, often demonstrating for higher wages or better working conditions. Wen, however, was really focused on his new development strategy - shifting away from export-led growth to ease domestic and international pressures. But many institutional challenges seemed to hamper domestic demand, and Wen was particularly concerned with pressures from America on China's policies for trade, exchange rates, energy, and investment.

 

§  Articles & Other Important Link(s):

·   Competitive Advantage of Nations – 90-211

§  Assignment Questions:

·   Why is China growing so fast? Using the exhibits, explain China's strategy. 

·   Who wins and who loses among emerging markets from China's accession to the WTO? 

·   Using the note on China's exchange rate, how much does it cost to the People’s Bank of China (PBOC) to manipulate the Yuan-dollar exchange rate every year? Is there a limit or could the PBOC keep on doing it forever?

Session Two- “Brazil: Leading the BRICs”

§  Case(s):

·   Brazil: Leading the BRIC’s? – 711.024

·   Inequality in Brazil – 711.086

§  Abstract: Brazil's new president, Dilma Rousseff, had announced plans to sustain GDP growth above 5 percent annually and continue the country's leadership role among emerging economies. Between 2003 and 2010, Brazil benefited from strong economic growth and stable policies under the Lula administration. Brazil also increasingly led the BRICs (the fast-growing countries Brazil, Russia, India, and China) in multilateral negotiations, notably in the World Trade Organization's Doha Round. Yet Brazil's actions to enforce a compulsory license of a patented therapy for HIV/AIDS and its victory in a longstanding WTO dispute with the United States over cotton subsidies had created tensions with major trading partners. Entering office in January 2011, Rousseff had the opportunity to outline a new agenda for international trade. Specifically, she had to decide whether to seek completion of the Doha Round, which was in a stalemate due to disputes over global intellectual property rules and agricultural subsidies and tariffs, or to instead pursue regional trade agreements in South and Central America. Rousseff also pledged active government involvement in the economy, described in the case as "Brazilian capitalism," but it was unclear whether fiscal expansion coupled with conservative monetary policies would reduce bottlenecks to growth and further temper Brazil's high inequality.

 

§  Articles & Other Important Link(s):

·   “How Africa can become the next BRIC” By Jim O’Neill

·   “BOOK: BRICS AND BEYOND” (Skim carefully pages: 5-7, and 75-84 and 131-149)

§  Assignment Questions:

·   What is Brazil's development strategy? (Use the CAN framework)

·    Does Brazil belong in BRIC? 

·   Does BRIC make sense as a bundle of countries? What makes it successful as an investment category? What makes it weak? Will the N-11 have the same success?

Session Three- Angola and the Resource Curse

§  Case(s):

·    Angola and the Resource Curse – 711.016

§  Abstract: Since emerging from decades of conflict in 2002, Angola has been growing at a scorching double-digit rate, led by its oil industry. But the nation remains beset with seemingly intractable problems: immense inequality, low life expectancy, a non-diversified economy, and constant grumblings of corruption. The global financial crisis and subsequent fall in state oil revenue drove a loan-seeking Angola towards either the IMF, who demand extensive reforms, or the Chinese, who seek to take a direct stake in the nation's recovery. The case explores the dynamics of post-conflict recovery as well as the challenges associated with a reliance on oil wealth, including the resource curse and Dutch disease.

 

§  Assignment Questions:

·   What is Angola's development strategy? (Use the CAN framework to understand Angola's "value proposition")

·   Is oil a blessing or a curse for Angola?

·   Is China helping Angola?

Session Four- South Africa

§  Case(s):

·   South Africa (A): Stuck in the Middle? – 711.084

§  Abstract: 15 years after ending apartheid, formal unemployment in South Africa was still at 24%. While the country had grown at 4 to 5% annually during the 2000s, the financial crisis set it back by 1 million more unemployed. Moreover, it seemed as if the nation were stuck between low wage and fully developed competitors. The government of Jacob Zuma has just adopted a "New Growth Path," hoping to create several million jobs over the next few years. Both the Finance Minister and the head of the Central Bank support the initiative, but worry how they can sustain fiscal discipline and control inflation, in light of these stimulative policies. Organized labor, meanwhile, has little sympathy for any sort of sacrifice.

 

§  Articles & Other Important Link(s):

·   Cracking the Next Growth Market: Africa

§  Assignment Questions:

·    Using the CAN framework, how would you characterize South Africa's development strategy? Is it working?

·    What can South Africa get out of its current “stuck in the middle status”?

·    According to the HBR Article “Cracking the Next Growth Market: Africa,” what are the current advantages and obstacles for the entrance of multinationals into Africa? (To answer this question please make sure to read the HBR piece on Africa's consumer market and to take a look at the Bloomberg graphs on Africa's middle class.

Session Five- Dubai: Debt, Development, and Crisis

§  Case(s):

·   Dubai: Debt, Development and Crisis (A) – 710.069

·   Dubai: Debt, Development and Crisis (B) – 710.070

·   Dubai: Debt, Development and Crisis (C) – 710.071

§  Abstract: On November 25, 2009, the city state of Dubai stunned markets by announcing that Dubai World, its flagship state holding company, would seek a six-month "standstill" on at least $4 billion U.S. dollars of its $26 billion in debt obligations. This case describes Dubai's development strategy in detail and narrates how, as part of that strategy, a series of state-owned holding companies accumulated billions of dollars in debt. The (A) case ends as Sheikh Ahmed bin Saeed, chairman of Dubai's Fiscal Committee, has to decide what to do about the financial troubles of Dubai World and other state-owned holding companies. The case presents Sheikh Ahmed bin Saeed having to decide among three options: the Dubai government can guarantee the debt, they can renegotiate the debt, or they can walk away (i.e., default). The B case describes the decision and the reactions to this decision around the world and presents a new decision on the part of bond holders of Dubai's state-owned holding companies. The C case briefly analyzes the advantages and disadvantages of Dubai's bankruptcy procedures, both for investors and for the holding companies of Dubai.

 

§  Articles and Other Important Link(s):

·   D&B Country Report on the United Arab Emirates

§  Assignment Questions:

·   What should Sheikh Ahmed bin Saeed Al Maktoum and Dubai's Supreme Fiscal Committee do about the debt of Dubai World? Should they guarantee the debt, restructure it, or walk away?

·    Could we see Dubai's crisis coming? What is Dubai's development strategy?

·    As an investor: would you have sold your bonds before December of 2009?

Session Six- Pakistan: Is Foreign Aid Helping or Hindering Development?

§  Case(s):

·   Pakistan: Is Foreign Aid Helping or Hindering Development?

§  Abstract: Not available

§  Assignment Questions:

·   What is Pakistan's development strategy? Is it working?

·   Skim the section on N-11 in the book “BRICS AND BEYOND”, here (pages 131-149).

·   Does Pakistan belong to N-11?

·   Is foreign aid helping Pakistan? Should the USA continue providing funding to Pakistan?

Session Seven- Liberia

§  Case(s):

·   Liberia – 712-011

§  Abstract: From 1989-2003 civil wars raged in Liberia, causing GDP per capita to drop an unprecedented 90 percent from peak to trough. The roots of Liberia’s conflict and economic decline are complex and intertwined, resting on over a century of discriminatory elite rule and twisted by ethnic politics during a military dictatorship. By late 2011, eight years of post-conflict government have restored basic order, re-opened the country to foreign investors, and jump-started the small economy. But the country’s business model may unsettle its political stability. As Africa’s first democratically elected female head of state and Nobel peace prize winner Ellen Johnson Sirleaf goes into her reelection campaign, she must decide how to keep the country on its fragile but quick recovery, sowing the seeds for peace and prosperity rather than renewed conflict.

§  Assignment Questions:

·   What caused the war in Liberia? What will prevent another one?

·   Is this a good place to invest?

·   What should Johnson Sirleaf do going forward? What should she say?

 

MODULE 2 Institutional Voids and Opportunities in Emerging Markets

Session Eight- Metro Cash & Carry

§  Case(s):

·   Metro Cash & Carry – 707-505

§  Abstract: Analyzes the globalization of Metro Cash & Carry, a German wholesaler, which has flourished in many foreign markets but struggled to gain traction in India. Considers Metro's experience in Russia and China to put the company's challenges in India in comparative perspective. Pays particular attention to the institutional obstacles for a multinational to tap into the opportunities offered by emerging markets.

 

§  Articles & Other Important Link(s):

·   Winning in Emerging Markets: A Road Map for Strategy and Execution (Chapters 1 & 2)

§  Assignment Questions:

·   What have been Metro Cash and Carry's key competitive advantages as it has moved into emerging markets?

·   How did Metro Cash and Carry adapt itself to each of Russia, China and India? What adaptations were necessary across the board, and what adaptations were idiosyncratic to particular country contexts?

·   How would you rethink Metro's approach to India going forward? What will it take to get Metro Cash and Carry accepted as a corporate citizen in India?

Session Nine- Silver Lake in Brazil

§  Case(s):

·   Silver Lake and Private Equity in Brazil: Carnaval or Calamity? – 712-004

§  Abstract: This case describes the recent boom in Brazil and recent developments in the private equity industry in that country. At the center of the case is Dave Roux, partner of the technology-focused, private equity firm Silver Lake, who is examining whether to open an office in Brazil. His decision will depend on the state of the Brazilian economy, of the private equity industry, and, ultimately, on the value proposition of Silver Lake. Is the current boom in Brazil a sign of a structural change or is it a bubble? Is it too late for a private equity firm to go to Brazil? Is the Brazilian market too saturated? How do private equity firms add value in Brazil? What's the right entry strategy for a private equity firm in Brazil? Should Silver Lake open an office in Brazil?

 

§  Assignment Questions:

·   Is the boom in Brazil this time for real? Can the country go bust again?

·   Should Silver Lake open an office in Brazil? What are the risks and opportunities of opening shop in Sao Paulo?

·   What strategy should they follow? Should they copy the model of General Atlantic, Warburg Pincus, Carlyle or Blackstone?

Session Ten- Sherritt Goes to Cuba

§  Case(s):

·   Sherritt Goes to Cuba (A): Political Risk in Unchartered Territory – 711-001

·   Sherritt Goes to Cuba (B): Dealing with Political Risk Under Raul Castro – 711-002

§  Abstract: Ian Delaney, CEO of Sherritt, a primarily a mining company, visited Cuba in the early 1990s to negotiate a deal to export nickel for their Canadian refineries. The case describes the difficulties of doing business in Cuba and the challenges Delaney overcame to turn Sherritt into a large diversified holding company that operates in mining, oil, utilities, telecomm, hotels, and others. Delaney did this while managing a relationship with an authoritarian regime with an anti-capitalist discourse.

 

§  Articles & Other Important Link(s):

·   “China group’s Cuba oil deal” By Marc Frank

§  Assignment Questions:

·   In the A case. Examine the economic situation of Cuba in the 1990s? How are they doing? Is this a good place to do business?

·   Given this macro framework, does it make sense for Sherritt to go to Cuba in the early 1990s? [i.e., think about institutional voids, etc...]

·   Please skim the article on Chinese investments in the energy sector in Cuba. Is China's entry into Cuba a threat for Sherritt?

Session Eleven- Bunge: Food, Fuel, and World Markets

§  Case(s):

·   Bunge: Food, Fuel, and World Markets – 708-443

§  Abstract: In 2007, Bunge, an agribusiness company, had over $26 billion in worldwide sales and was considered, along with Cargill and Archer Daniels Midland (ADM), one of three very integrated worldwide agribusiness companies. Headquartered in White Plains, NY, the company has traditionally possessed a strong presence in Brazil. Describes Bunge's tradeoff between efficiency of global operations and local responsiveness in an uncertain business environment. New world developments were effecting Bunge directly: high oil prices, a growing demand in emerging economies like China and India, and the possibility of agribusiness companies competing successfully in the production of biofuels. Bunge had traditionally followed an organizational model that was integrated but decentralized, trying to strike a balance between the efficiency of a global entity and the speed of local businesses. What would be the best strategy for Bunge to respond to the external changes imposed by high energy prices and increasing demand from emerging economies? How aggressively should Bunge invest in the rising biofuels markets?

 

§  Assignment Questions:

·   Should Bunge invest in biofuels? Where? Design an action plan for Bunge's biofuels division considering the financials of the firm and the global context.

·   Examine Bunge's global supply chain. Why does Bunge value integration so much? What is the value proposition of the company?

·   Are you more willing to invest in Bunge stock after having read the case? What are the major pros and cons you see in the company's value proposition?

Session Twelve- Veracity Worldwide

§  Case(s):

·   Veracity Worldwide in Syria: Assessing Political Risk in a Volatile Environment – 712-009

·   Veracity Worldwide: Evaluating FCPA-Related Risks in West Africa – 712-010

§  Abstract: This case explores the dynamic set of political risks raised by a local-partner contract renewal within the context of Syria's unfolding political upheaval. Cambell Technologies, a US-based software firm, was evaluating whether to renew its licensing agreement with Elevate, its Damascus-based distributor. Elevate's strong sales performance and sound management seemed to justify a renewal of its agreement, but the possibility of political change in Syria added potential new variables to Campbell's calculus. The case protagonist, Steven Fox, CEO of risk assessment and advisory firm Veracity Worldwide, had to evaluate the risks at play and advise Campbell's CEO on whether to renew its relationship with Elevate Software Solutions.

 

§  Assignment Questions:

·   Should Steven Fox and his team and Veracity advise Jim Barnes to go ahead with the Megametals joint venture in West Africa? What action plan should they propose? What are the reasons for concern? What FCPA cases could potentially be used as precedent against Barnes in the United States?

·   What should Robert Larson do with its Syrian partner, Elevate Software Solutions? Should he renew the contract they have? Are there any potential FCPA-related risks in this deal? What should the action plan be for Robert Larson and Campbell Technologies?

 

Module 3 State Capitalism in Emerging Markets: Challenges and Opportunities

Session Thirteen- Sovereign Wealth Funds and State Capitalism

§  Case(s):

·   Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization? – 712-022

§  Abstract: State Capitalism is everywhere in emerging markets (and developed countries) and managers have to learn to live with it, understand its problems, and find opportunities to do business with them. Managers working in large multinational corporations and financial institutions will most likely either do business with or compete with state-owned enterprises (SOEs) in emerging markets, they will have to deal with the government, and they will have to dodge expropriation risk. Management consultants in emerging markets more and more have to advise state enterprises on how to improve practices and adopt better corporate governance mechanisms. Investment bankers help SOEs in their efforts to reform and to privatize all or part of their capital. In this module we will examine the role of State Capitalism in emerging markets and we will look at some of the challenges and opportunities for managers of state-owned enterprises. The first case talks about Sovereign Wealth Funds, which are arms of governments that invest foreign exchange reserves in risky assets (or at least riskier than Treasury Bonds). Should we be afraid of them?

 

§  Other Important Link(s):

·   “State Capitalism Comes of Age: The End of the Free Market?” by Ian Bremmer

·   Ian Bremmer: State Capitalism

§  Assignment Questions:

·   Should we be afraid of Sovereign Wealth Funds?

·   Should SWF’s be regulated? How? By whom?

·   From the Article by Ian Bremmer: What is State Capitalism? What are the three main problems with state capitalism according to Bremmer? Should we be afraid of the rise of State Capitalism in emerging markets?

Session Fourteen- Hermitage’s Russian Quandary

§  Case(s):

·   Hermitage’s Russian Quandary (A) – 711-054

§  Abstract: In June 2007, the offices of Russian hedge fund Hermitage Capital were raided by Moscow police; in the months that followed, Hermitage founder Bill Browder found himself banned from Russia and fending off efforts to expropriate the fund's Russian assets. This case describes the challenges faced by Hermitage in responding to these threats, and more broadly discusses the perils of doing business in a business environment with weak legal and political institutions.

 

§  Articles & Other Important Link(s):

·   Hermitage Reveals Russian Police Fraud

§  Assignment Questions:

·   How would you rate the strategy that Hermitage followed prior to the 2007 raid (Smart/interesting but with problems/too risky)? What was Hermitage’s value proposition? (What institutional voids were they trying to fill in?)

·   In early 2008, at the end of the (A) case. Browder finds out about a second lawsuit against the holding companies of Hermitage. What should Browder do now (i.e., fight back, back down, change strategy)?

·   Since Bill Browder will be in class, we will have a chance to discuss with him his experiences and the current strategy of his fund. So think about his investors. Are they happy with Browder in 2008? What would they want him to do after that? What can you learn that you can apply to other emerging markets?

Session Fifteen- Indian railways

§  Case(s):

·   Indian railways: Building a Permanent Legacy? – 711-008

§  Abstract: In May 2009, Lalu Prasad Yadav, the railway minister for the government of India, was about to leave Indian Railways (IR), the government entity that, under his supervision, was in charge of operating India's railway network. Together with Sudhir Kumar, his officer on special duty, and the railway board, Prasad had led Indian Railways through one of the most impressive business turnarounds in recent history.IR had been on the brink of bankruptcy in 2001. Yet by 2008 the company was operating profitably, with a cash surplus (before dividend) of $5.8 billion and an operating ratio (i.e., total working expenses over total earnings) that had gone from 92% in 2004 to 76% in 2008. As a result of the parliamentary elections of 2009, Prasad had to hand over the reins to a new minister. Still, one question remained: Would the turnaround efforts and the improvements in efficiency at IR be permanent?

 

§  Other Important Link(s):

·   India Today “Indian railways bankrupt under Mamata

·   Euromonitor International Country Report: Retailing in India

 

§  Assignment Questions:

·   If Indian Railways were a private company and you were hired as a consultant to revamp the company in 2004, what would you recommend?

·   How would your recommendations differ from the reform plan adopted by Minister Lalu Prasad and the Officer in Special Duty, Sudhir Kumar? What are the main political constraints for change in Indian Railways?

·   Will the reforms of Minister Prasad and Sudhir Kumar be long lasting?

Session Sixteen- Vale

§  Case(s):

·   Vale: Global Expansion in the Challenging World of Mining – 710-054

§  Abstract: In 2009 the management of Vale, a Brazilian diversified mining company and the largest iron ore producer in the world, was under pressure from at least two fronts. First, the emergence of China as the most important consumer of iron ore in the last few years had changed the pricing system for iron ore from long-term contracts based on negotiated "benchmark prices" to contracts based on spot prices, usually forcing mining companies to pay for shipping. Second, for Brazil's charismatic president, Lula, a former union leader, Vale's layoffs during the global financial crisis and its perceived move away from Brazil (as Vale increased its exports to China and purchased Chinese vessels to ship iron ore to Asia) were reasons to start an open campaign to pressure Vale and Agnelli to invest in integrated steel mills in Brazil. In October of 2009, the CEO of Vale, Roger Agnelli was going to meet with Lula and had to decide what to do to attenuate these political pressures. What could Agnelli do to deal with political pressures at home? Was the purchase of large vessels to ship iron ore to Asia a good decision at a time when the shipping industry had spare capacity?

 

§  Other Important Links(s):

·   Financial Times Video Interview of Roger Agnelli, CEO of Vale

§  Assignment Questions:

·   What could Agnelli do to deal with political pressures at home?

·   What is Vale's value proposition?

·   Was the purchase of large vessels to ship iron ore to Asia a good decision at a time when the shipping industry had spare capacity?

Session Seventeen- Gazprom

§  Case(s):

·   Gazprom (A) Energy and Strategy in Russian History – 709-008

·   Gazprom (B) Energy and Strategy in a New Era – 709-009

·   Gazprom (C) The Ukrainian Crisis and Its Aftermath – 709-009

§  Abstract: Critics have accused Gazprom, the world's largest natural gas producer, of eschewing market principles in favor of the foreign policy priorities of the Russian government, ever since the energy giant cut off the supply to Ukraine in January of 2006. The purported motive for the decision, however, seems to indicate the opposite: the company claimed that it had no other choice because the sides failed to conclude a contract on the terms of future trade. The case takes a look back in history for clues that may resolve this paradox. It highlights how politics shaped the economics of natural gas trade in the former Soviet Union and Europe since the late 1960s until the end of the 1990s; sketches the story of the creation of Gazprom by the first post-Soviet government of Russia; and describes how the erection of new sovereign borders in the wake of the dissolution of the Soviet Union, coupled with political and economic transition, created major problems in the gas trade between the former Soviet republics, emerging with the greatest intensity in the Russian-Ukrainian relations.

 

§  Assignment Questions:

·   In the dispute between Gazprom and Naftogaz Ukrainy, who was right?

·   Should Europe and the former Soviet Republics be afraid of Gazprom? Or, is it a normal energy company just going about its business? 

·   What are the advantages and disadvantages Gazprom has by having the government owning 50+1 of the voting shares? Why not 20%? Why not 100%?

Session Eighteen- IPO of Agricultural Bank of China

§  Case(s):

·   The IPO of Agricultural Bank of China (ABC) (A) – 712-006

§  Abstract: This case describes the process that led to the IPO of Agricultural Bank of China (ABC), the biggest in the history of humanity! The A case describes the challenges that the management team at ABC (together with Goldman Sachs, Morgan Stanley, and others) had to care of in order to launch the public offering. The objective of this case is to put you in the shoes of the management team and the team of advisors and think how ABC should sell its business model to investors worldwide at a time when markets were going through some turbulence (there was high volatility) and there was high uncertainty about the future of the World and China.

 

§  Assignment Questions:

·   What is the business model of ABC? Can the management team of ABC and its advisors sell this model in the turbulent times of 2010? How?

·   China has a strong tradition of State Capitalism. Is that an advantage or a disadvantage for investors interested in the shares of ABC?

·   For investors: Think about a story that can lead the purchase of shares into a disaster (not so hard given recent events)

Session Nineteen- The Barber of Buenos Aires: Argentina’s Debt Renegotiation

§  Case(s):

·   Protecting Foreign Investors – 706-044

·   Barber of Buenos Aires: Argentina's Debt Renegotiation – 706-034

§  Abstract: Tells the story of Argentina's aggressive strategy for renegotiating its sovereign debt from 2003 to 2005. Most creditors accepted the offer to swap their debt for new securities worth 35 cents on the dollar, with no recognition of all past-due interest. Many holdouts, however, remain outside the deal. Some experts believe that Argentina's stance will have negative consequences for the country's private sector and gives a worrisome signal about public policies; others maintain that circumstances beyond the government's control had placed the country in an unsustainable situation, and the successful renegotiation opens up new opportunities. The case presents the story of Argentina's debt saga from the point of view of the country's creditors (foreign and domestic), its government, and private Argentine companies that had to do business in the post-renegotiation environment. Also, discusses the larger issue of how the international financial community should handle sovereign debt workouts.

 

§  Other Important Link(s):

·   The Economist: “Emerging-market debt: Stylish haircut”

·   The Economist: “Argentina under the Kirchners: Socialism for foes, capitalism for friends”

·   The Economist: “Argentina after Kirchner: The end of an era”

·   Financial Times: “Irish crisis demands new EU response”

§  Assignment Questions:

·   Was President Kirchner's decision to repudiate a large portion of the nation's foreign-currency public debt the right decision for Argentina?

·   Did Argentina emerge stronger or weaker as a result of the debt repudiation?

·   What are the best options for addressing the challenge of sovereign debt restructurings at the international level? Can they be implemented in the current global context?

Final Session: Banco Ciudad

§  Case(s):

·   Banco Ciudad (A): Who is the Owner – 712-029

§  Abstract: The state-run Banco de la Ciudad de Buenos Aires (Banco Ciudad) was losing money in 2007. Early in 2008, Federico Sturzenegger, a renowned academic in Argentina, was appointed executive chairman by the city government and charged with turning the bank around. But just four months later, Sturzenegger was already facing the 45th day of a labor conflict sparked by union representatives on account of having fired six employees. The showdown raised several questions. First and foremost: Who owned Banco Ciudad? The city government? The citizens? Its employees? How could this bank use its strengths and overcome its weaknesses to best serve its constituents and the public? This case follows Sturzenegger's eventful first few years in office to examine how a state-owned enterprise maneuvered in a challenging environment to hit its targets of greater efficiency and profitability.

 

§  Assignment Questions:

·   What was wrong at Banco Ciudad when Federico Sturzenegger took the job of CEO and Chairman?

·   How would you fix these problems? Are your proposed solutions going to be accepted by the employee union?

·   What is the comparative advantage of the bank? How could Banco Ciudad use this advantage(s) to improve its bottom line?

 

 

 

 

 

 

 

 

 

 

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