Mexican Economy-Creative Financing to the Rescue
Dziobek, Claudia
Last August, Mexico ran out of foreign exchange to service its huge external debt and pay for imports. The government had to request emergency loans from Western governments in order to...
...Maintaining "performing loans"-the term for loans being serviced-on the banks' balance sheets seems to be a higher concern...
...In most cases of reschedulings, private bankers do not lose a penny...
...Central banks and governments were then forced to jump in, using taxpayers' money for the rescue operation...
...ALFA, the biggest Mexican conglomerate built around the steel industry, is laying off one-fifth of its employees and has to sell off half of its assets to avoid worse measures...
...Externally imposed, IMF programs are seen as public humiliation...
...The IMF was to Mexico what welfare is to the middle class...
...The private banks caused this mess and they've got to help us clean it up," said one senior central bank official involved in negotiating the BIS package...
...Many of these countries continue to be in deep economic austerity (and most probably because of it...
...Rescheduling Private Debt Private bankers agreed to a restructuring of the Mexican debt patterned after rescue operations for other third world countries...
...Nationalization of Banks To the anger of the domestic banking and business community, and to the surprise of everyone, Mexico nationalized its private banking sector in early September in an effort to contain the uncontrollable drain of foreign exchange...
...Their rescheduling agreements involve economic adjustment programs lasting several years...
...Gang-Up" Possible...
...Billions of dollars were poured into the country under a variety of quickly fabricated methods, referred to as "creative financing" by the bankers...
...Clearly Mexico's case was exceptional...
...That third world economies are usually set back decades in their development by the austerity programs is not of consequence...
...The resources made available included: * $1.85 billion through the BIS, the central bank of the central banks, half of which was to be provided by the U.S...
...Given this outlook, the implementation of IMF policies may be politically impossible to carry out even for a pro-Western leader such as President Miguel de la Madrid Hurtado...
...In a situation where three-fourths of the $80 billion debt is owed by the public sector, this consolidation of power in government hands is welcomed by some U.S...
...Resistance will be met at each step along the way, similar to the opposition to budget cuts in this country under the "balanced budget" Administration of Ronald Reagan...
...banks to the brink of default...
...A precarious situation turned into an acute crisis once wealthy Mexicans and foreigners started taking their money out of the country by converting it to more stable currency...
...Political Disaster The IMF austerity program that Mexico is agreeing to will not easily be implemented...
...Even before the takeover, the public sector accounted for 50% of the nation's gross domestic product...
...Almost one million workers were sent home in the first eight months of 1982...
...Additionally, prices of export items such as oil are raised internally to discourage consumption, freeing up the items for export...
...Citibank, for example, is reported to have loaned 50% of its capital base to Mexico, making it highly vulnerable...
...New taxes will be imposed, charges for public services will increase and 106 out of 740 stateowned companies and government agencies will be closed...
...ture of the financial markets' stability, quick action to sweep the Mexican problem under the carpet, or at least make it look "manageable," is of prime importance...
...Last August, Mexico ran out of foreign exchange to service its huge external debt and pay for imports...
...300 million in prepaid oil shipments from Spain...
...Though they had called for 50% wage hikes, workers in some industries cancelled the strikes they had threatened...
...A communique from the Mexican Business Coordinating Council called the move "a definite coup against private business and a clear sign of the country's entry into socialism...
...Ball-Out of the Banks...
...As early as the end of vate banks, have taken more 1981, it became clear that the coun- money out of the country than all try would have trouble meeting payments on the external debt, half of which was scheduled to fall due in less than a year...
...It included such novelties as paying for Mexican exports before they had even been produced...
...Commodity Credit Corporation to finance food exports to Mexico...
...Turkey, for example, has rescheduled its $3 billion debt owed to private banks three times in a row and is currently requesting another rescheduling...
...Private banks held off and waited for government action before attempting to raise new funds for Mexico themselves...
...The scheme is also designed to cut internal spending by curtailing the government budget and lowering real Jan/Feb 1983 wages...
...With Mexico out of foreign exchange, the obvious conclusion seems to be that interest payments are being taken directly from dollars flowing in from the IMF or U.S...
...This is a new and positive development, and one which gives great hope for the future of the developing countries in the remaining years of this century...
...Claudia Dziobek is a German econo- mist who is preparing her dissertation, "International Commercial Bank Lending to Third World Countries in the 1970s," at the University of Massachusetts at Amherst...
...Fund (IMF...
...Yet actually imposing sanctions against the banks may be difficult...
...In 1976, for example, Jamaica was forced to get by without any new foreign exchange loans until the IMF mission could detect "evidence of economic recovery...
...Bankers will insist on Mexico meeting interest payments...
...Currently about 15 third world and Eastern European countries, heavily indebted to private commercial bankers, are in serious financial troubles...
...In Mexico, the bank nationalization is not as radical a step as a similar act would be in the United States...
...A loss of the loans outstanding to Mexico would be disastrous...
...An alternative cure is suggested by Mexico's advisers from Cambridge University who adhere to more humane-and reasonable-theories...
...Qupdate * update . update update "Q 0. Mexico City residents pause at a newsstand in August to check the latest exchange rate for pesos to dollars, Some of the Mexican Left and the pro-government Labor Congress celebrated the nationalization as a victory...
...Though officially labeled support of the Mexican economy and government, many begin to suspect that it is equally a bail-out for the private banks...
...To discourage capital "I can affirm," said former Presiflight, exchange controls were dent Jose Lopez Portillo, "that in reimplemented for the first time...
...Previously attempted joint actions by the "South" against the "North" to solve the debt trap once and for all had failed precisely because Brazil and Mexico, although in principle in solidarity with the Group of 77*, refrained from demanding debt relief from any of their creditors...
...IACU Reportupdate * update . update . update Ia Mexicans line up to exchange currency in Juarez as the rate fell to 100 pesos to the dollar in September...
...The Mexican collapse was the sleeping giant that nobody was prepared to confront...
...The effectiveness of government control over the banks in containing capital flight and administering the debt restructuring Jan/Feb 1983 remains to be seen...
...If the country complies with the policies prescribed by the Fund and continues to service its external debt (without contracting new credits), banks will stretch out the debt and the IMF will grant support loans...
...In an article called "Banking Against Disaster," Citibank Chairman Walter B. Wriston stressed what he saw as the positive side of the disaster...
...Bankers viewed it as a serious threat to the stability of their own existence and of international financial markets...
...Given the country's poor credit rating, raising new funds in the Eurodollar market would be difficult...
...The new loans to Mexico were put together by the United States and Western European governments and central banks...
...Luis Jose Dorantes, head of the Labor Congress, applauded the decision to allow bank employees to unionize...
...Faced with the alternative of unemployment (with no benefits), workers settled for a pay raise of 12%, far below the 100% inflation rate...
...Said one banker, "Many of those who are taking dollars out of the country were in Congress hypocritically applauding the President's decision...
...NAC AReport Tourists in Mexico City change dollars for pesos after the government temporarily suspended dollar trading in August...
...Otherwise they would have to write off the loans as losses which would bring several U.S...
...The bankers' insistence on rigid, IMF-supervised austerity programs have provoked protests, riots and deep resentment throughout the third world...
...Devaluations will also mean the curtailment of some imported goods...
...Theoretically, the squeezing out of internal wealth and income to make it available to the foreign creditors would best be accomplished by taxing the rich, cutting imports of luxury items and limiting the amount individuals may hold in foreign exchange accounts...
...Despite their philosophical commitment to private ownership, the view of many U.S...
...This in turn will cause real wages to fall, which will not be accepted easily...
...But in practice, wage cuts and cuts in vital imports-both disruptive of the whole economy-are usually the primary source of funds...
...Bankers have made public "no cause for concern" speeches a regular institution...
...Additionally, the production of oil and other export goods should be increased so that payments could be made out of a growing pie rather than squeezing money out of a shrinking economy...
...Creative Financing Breaking with established traditions, the international financial community, composed of private banks, central banks organized through the Bank of International Settlements (BIS) in Switzerland and the IMF, rushed to package a rescue operation for Mexico...
...However, this does not always work well, particu43update * update . update e update larly in times such as now, when oil is cheap and there is a wave of protectionism in the Western world...
...The group now includes over 120 countries...
...bankers was reflected by a spokesperson for Bank of America: "This is a positive step in that it puts the Mexican government clearly behind its banking system...
...An extensive rescue operation was quickly undertaken by Western central bankers and governments in return for Mexico's promise to work out an austerity plan with the International Monetary alone...
...4-5 billion from the IMF to replace the BIS loan as soon as the IMF had raised the money and agreed on the terms of an austerity plan with Mexico...
...There is no way we can lend official money to Mexico so that it can repay the banks...
...Mistrustful of the "free market" solution, Cambridge supported exchange controls and strict monitoring of imports to ensure that only crucial imports were given priority...
...With an economy structured so that imports are crucial to most industries, disruptions will be felt in many production sectors...
...According to Creative Financing To The Rescue conservative estimates, they have deposited $14 billion in Eurobanks, $12 billion is held in foreign currency accounts within Mexico and at least another $25 billion invested in real estate in the United States the empires that have exploited us since the beginning of our history...
...The Mexican plan includes an IMF-administered austerity program aimed at increasing exports and thus foreign exchange earnings through devaluations...
...41update * te ete update * update In similar acute foreign exchange crises, other third world countries have been subjected to several years of IMF-imposed austerity measures only to gain meager support from the Fund and few if any concessions from the banks...
...The government had to request emergency loans from Western governments in order to avoid ers for a three-month moratorium on the $10 billion due in principal payments...
...cent years a group of Mexicans led, Mexico's problems did not arise counseled and supported by priovernight...
...Cambridge Versus Chicago IMF officials derive their wisdom from the University of Chicago economists who teach how to cure through bloodletting...
...1 billion in advance payments from the U.S...
...In every way, this is a more reasonable long-term plan of action...
...government for oil deliveries for its "Strategic Petroleum Reserve...
...taxpayers...
...International bankers now desperately try to avert the obvious conclusion, namely that a common solution to the third world debt crisis is necessary...
...Bankers would have a hard time convincing potential depositors to invest their money in a bailout operation for Mexico...
...This includes not only workers and peasants but politicians and some industrialists as well...
...banks alone account for about 30% of that, with the Bank of America ($3 billion), Citibank ($2.5 billion), Chase Manhattan ($1.75 billion) and Chemical Bank in the forefront...
...It will no doubt bring intensified social tensions...
...banks, at least for the period of acute crisis...
...To make things worse, ailing local businesses will have to watch foreign investors take their place because they can offer the country attractive foreign exchange...
...But that was in 1976 at the UN Conference on Trade and Development IV, when neither Mexico nor Brazil thought they would ever fall on their knees before the IMF...
...The execution of drastic cutbacks is not simply a technical problem to be solved by budget specialists...
...The Bank of America has $3 billion in loans outstanding to Mexico...
...PEMEX, the state-owned oil giant, said it planned to fire 10,000 workers by the end of the year...
...More than two-thirds of Mexico's debt is owed to private banks...
...Funds made available by the debtor country through the austerity programs are used to continue servicing the debt...
...In addition, $10 billion in principal payments to private banks were deferred for 90 days (and most likely longer) and bankers agreed to restructure Mexico's private debt, that part of the external debt owed to private banks...
...Traditionally, bankers have insisted that debt-servicing difficulties are due mainly to mismanagement and corruption rather than structural constraints and the world recession faced by countries throughout the developing world...
...Because of the psychological na'seeking to speak with one voice on trade and development matters, the Group of 77 developing nations was formed in Algeria in 1967...
...One by one, those countries are finally breaking through the vicious circle of poverty...
...Federal Reserve...
...And half of the Mexican banking system had been transferred to the public sector in the mid seventies...
...This mechanism works even in times of slow growth internationally and negative growth internally...
...1 billion in loans guaranteed by the U.S...
...Devaluations will accelerate inflation as imported goods get more expensive...
...Central bankers are eager to deny such charges...
...Before the Mexican disaster, to prove their point bankers cited Brazil, Mexico and Argentina as examples of heavily indebted third world countries "competently" managing their economies and external debts...
...Unemployment or underemployment is already estimated at 45...
...But the IMF does not allow for experimentation...
...With Mexico insolvent, Brazil accepting IMF credits and Argentina in arrears, bankers uneasily take notice of the fact that third world and Eastern European countries 42 are now all in the same boat, opening the possibility of a "gang-up" against the banks...
...The internal "savings" are complemented by foreign exchange infusions from the IMF...
Vol. 17 • January 1983 • No. 1
