The Vicious Cycles of Mexican Debt
Marichal, Carlos
Mexico's $170 billion foreign debt is the second largest in the Third World, surpassed in size and complexity only by that of Brazil. Its growth has been exponential since the mid-1970s,...
...im and has been restructured through new issues in U.S., e large European and Japanese financial markets...
...Mexican national corporations have taken loans or issued abroad in 1996 for over $10 billion...
...1 8 The new president, Ernesto Zedillo, was barely in office when Bank President Mancera committed the cardinal sin of central bankers by sending messages to privileged players in the market that he was going to devalue...
...But at the same time, the new generation of so- ple, argued t called neobanqueros began to look abroad for new Chiapas had sources of funds to finance their powerful financial- kets but this, industrial groups.1 6 Stock Exchai As a result, between 1990 and 1994, the foreign pri- when it begai vate debt began to rapidly grow again, and with a much $1.5 billion i shorter timetable of amortization than that of the late was the asss 1970s...
...A recent study on this new financial/industrial elite is that of Elvira Concheiro B6rquez, El gran acuerdo: gobierno y empresarios en la modernizacion salinista (Mexico City: UNAM/ERA, 1996...
...2. Quijano, Finanzas, p. 85...
...The involved in organizing the financial rescue pla Mexico in November, 1982 were basically the s; those involved in February, 1995...
...The debt service plus the huge amortizations of outstanding debt have obliged Mexico to make debt payments abroad that surpassed $35 billion per year in both 1995 and 1996the highest figures for any country in Latin American history...
...This package incl $1.7 billion dollar IMF loan, a $2.3 billion Worlb loan, a commercial bank loan of $1.6 billion, VOL XXXI, No 3 Nov/DEC 1997 Club restructuring agreement of $1.5 billion and a $1 billion dollar credit from the government of Japan...
...Its growth has been exponential since the mid-1970s, even through the prolonged debt crisis of the 1980s...
...In point of fact, the average maturity of this new and huge dollar-indexed debt was less than eight months by early December...
...Miguel Mancera, the Bank, convinced Pedro Aspe, the Finance, that one way of countering the 28 NACLA REPORT ON THE AMERICASREPORT ON THE DEBT capital flight that followed the assassination would be to issue new short-term financial instruments indexed to the dollar...
...in all by 1981 they were responsible for over $10 billion of foreign loans and over $8 billion in short-term external obligations...
...While the regulation of these flows was not possible, by organizing the huge financial package for Mexico, the U.S...
...See Graph 1...
...While approval by the Mexican government of the spate of new loans was generally required, neither bankers nor politicians appeared to be overly interested in a careful monitoring of the accumulation of debts, nor whether the companies receiving the money were truly capable of servicing these debts...
...Forbes (June 1997) currently estimates Slim Helu's fortune at over $6 billion...
...They included t Treasury, the IMF, the World Bank and representat private international banks...
...y 1980 the number of global loan transactions had become enormous but there was no adequate way of knowing exactly how much money was involved, how many players were operating, and how this might affect the finances of the debtor countries...
...The errors of the financiers-public and private-proved more costly than ever, as more than one million people lost their jobs in 1995, a large number of banks entered into technical bankruptcy (being saved only by government intervention) and the gross national product dropped 8% in one year...
...banks provided loans to Mexican public and private enterprises, but by 1982 six large banking corporations led the pack with a total of $11.3 billion in Mexican loans...
...A major attrac- 1993, receive tion for the return of these funds to Mexico was the pri- fifth of all nei vatization of numerous state-owned industrial and bank- sum, financial ing firms...
...Most of that money came out of petroleum revenues, but even larger payments had to be made to the international banking and investment community on outstanding short and long-term debt...
...See article by Manuel Duran, "Alarma a inversionistas la deuda de Cemex," El Financiero, July 5, 1997, p.13...
...These huge debt-service o tions quickly went beyond the relatively limite getary possibilities of Latin American govern financial globalization and indebtedness had sur both expectations and fiscal realities...
...The California-based Bank of pecific America, for example, arranged financing for various which private banks including $500 million for Bancomer, article $120 million for Banorte and $150 million for Banco tions...
...Most of these were multilateral loans provided by the World Bank, the InterAmerican Development Bank (IDB) and the International Monetary Fund (IMF...
...to pull billions of dollars out of emerging markets in Latin America and Asia...
...4. A third factor was the propensity of military governments-particularly in Argentina, Brazil, Chile and Peru-to take large loans for acquisition of huge amounts of sophisticated modern weaponry in the 1970s...
...Over the decade and a half following World War II, Mexico-like the majority of Latin American nationsnegotiated few foreign loans...
...The majority of lenders, both domestic and foreign, who bought tesobonos did not lose money...
...By December, 1994, $30 billion of these bonds-called tesobonos-had been placed among wealthy domestic and foreign investors...
...Jacques Rogozinski, La privatizacion en Mexico...
...3 Added to this First World enthusiasm was the competition among Latin American state-owned companies and banks-and later among large private banks and corporations-for additional funds...
...Treasury, slightly over $17 billion by the IMF, some $4 billion by the World Bank and the IDB and less than $1 billion by commercial banks...
...VOL XXXI, No 3 Nov/DEC 1997REPORT ON THE DEBT billion by early 1982...
...3. See Robert Devlin, Debt and Crisis in Latin America: the Supply Side of the Story (Princeton: Princeton University Press, 1989...
...commercial bankers and government officials is found in Fernandez Sotelo, "El 6ltimo rescate," Tesis en ciencias y tecnicas de la informaci6n, Universidad Iberomericana, 1994...
...4 The bulk of the Latin American loans went to state enterprises and banks which demanded much financial support for their fast expansion plans in the 1970s...
...These conditions were met up through the middle of 1981, but subsequently local and international economic conditions changed dramatically and forced ALFA, among others, into bankruptcy, followed by a prolonged restructuring process...
...On December 20, 1994, Mancera and the new finance minister, Jaime Serra Puche, resolved to move to a more flexible exchange rate, allowing for a 15% devaluation...
...5 Private Mexican corporations also went abroad for financial support, spearheaded by a group of industrial and financial corporations based in Monterrey, the economic capital of northeast Mexico...
...See the articles by Martin Werner, Director of Public Credit of the Mexican government published in La Jornada, August 14 and 15, 1997...
...The Mexican debt, however, was not linked to arms buying...
...the Bank of International Settlements (BIS) extend $1.85 billion in credits...
...The Vicious Cycles of Mexican Debt 1. The most penetrating analysis of the loan boom of the 1970s is still Jos6 Manuel Quijano et al, Finanzas, desarrollo economic y penetraci6n extranjera (Puebla: Universidad Aut6noma de Puebla, 1985...
...According to a recent report, during 1996 this huge financial bailout cost Mexico the equivalent of 8.6% of total GNP, a sum greater than bank bailouts in any other country in recent years...
...Standing at $7 billion in 1972, it doubled to $14 billion in 1974 and doubled again to $29 billion in 1977, reaching the phenomenal sum of over $80 25 Carlos Marichal teaches economic history at the Colegio de Mexico in Mexico City...
...This grim prospect spurred a av series of international financial agencies into action to produce a rescue mark package which could serve to deter a possible debacle...
...The huge debt service requires ch year large annual payments to the United States, Europe and ".-26 Japan, while at the same time, internal demands for impact investment stimulate a large flow of new foreign loans Latin to Mexico...
...Reserves then plummeted after the nation...
...Treasury-IMF financial rescue package allowed for a huge transfer of funds to Mexico which allowed the Mexican government to pay off each of the successive monthly amortizations on schedule through 1995...
...Latin Finance, March, 1997...
...direct invest Among the larger firms sold by the Mexican govern- money pouri ment between 1989 and 1993 was the public telephone stock market Accepting the massive issue of tesobonos was perhaps the most serious error committed by any finance minister in the history of modern Latin America...
...As it turned out, this new debt, which had to be paid off in less than one year, was a time bomb, constituting a financial burden that would soon lead to the bankruptcy of the government...
...The result was that the dollar reserves of the Bank of Mexico declined and the pressure for a devaluation built up...
...28-44...
...An important economic analysis which proposes ways of getting out of the crisis is Macario Schettino, Para reconstruir Mexico, (Mexico City: Oceano, 1996...
...A detailed analysis of the rescue package is in Carlos Marichal, "La devaluaci6n y la nueva crisis de la deuda externa mexicana: reflexiones y reomendaciones," Este Pals, (Mexico) June 1995, no...
...In all, the Mexican govern- into Mexico ment received $12 billion for these valuable properties, General Agr which were actually worth much more.14 the subsequ At the same time, the Salinas Administration pro- November, 1 ceeded to sell off the 23 commercial banks which had been been nationalized in 1982, obtaining an additional $12.3 billion from domestic investors.15 The principal new owners-approximately 220 individuals-used these financial institutions to revamp the entire industrial-banking structure of Mexico, leading to a dramatic process of concentration and centralization of domestic capital...
...4, p.56 27...
...as fattened by the imports that now flowed with the country's new membership in the cement on Trade and Tariffs (GATT) and ent negotiation of NAFTA, ratified in 993...
...This helps explain why the representatives of many New York mutual funds specializing in international investment denounced the devaluation as an irresponsible policy measure...
...he history of Mexican events in 1994 provides an excellent case study of how politics can determine financial developments, though not all political events have the same impact...
...The big six were Citicorp, Bank of America, Manufacturers Hanover, Chase Manhattan, Chemical Bank and J.P...
...NACIA REPORT ON THE AMERICASREPORT ON THE DEBT Federal Reserve System-then headed by Volker-increased interest rates in the early 198 majority of Latin American debtors had to finch tional loans to meet the costs provoked by the ir in interest payments...
...93-94...
...The IMF would provide $4.5 billion from its extended drawing fa to help guarantee debt-service payments on the M debt...
...2 0 The rescue package was made necessary by the global volatility created by the sharp increase in short-term international capital flows...
...When the threat of to redeem the dollar-denomii devaluation appeared after the Colosio assasination in March, it had been these same money managers who had insisted that there should be no change in Mexican monetary policy, but by doing so they were only increasing the risks of an even greater devaluation...
...The Mexican nge continued to rise until mid-February, n to slip after the Finance Ministry sold off n Telmex stock, depressing the market...
...The Brady Plan thus became operative for the Mexican debt in 1989, serving as the basic model for subsequent financial arrangements in most other Latin American nations.12 Once the Brady Plan had proved a success to the international banks, the Salinas Administration adopted 27REPORT ON THE DEBT strategies to attract more capital from abroad in order to in the United relaunch economic growth...
...On December 21, in the short space of five hours, the bankers bought some $8 billion dollars, virtually wiping out the last reserves of the central bank...
...The outcome of the devaluation was a financial crisis followed by the worst economic depression since the Great Depression of the 1930s...
...While most of the foreign loans during the 1960s and early 1970s were extended directly to the Mexican government by multilateral financial agencies, from the mid1970s the international debt scenario changed dramatically as private U.S., European and Japanese banks aggressively sought out new clients in Latin America...
...2 ' In effect, the U.S...
...Moises Naim, "Latin America the Morning After," Foreign Affairs, (July/August, 1995), Vol...
...In the spring of 1983, two gr commercial banks provided an additional $7 bil credits to Mexico in order to stretch out the rescue age of November and to guarantee interest paym 1983.8 In years following there were ongoing n, tions, many of them with the Bankers' S1 Committee, headed by William Rhodes of Ci which represented the 530 international banks tl interest in the Mexican debt...
...3 0 of the The total Mexican debt of $170 billion has not grown tempo- much since 1995, basically because of the huge payappear ments on public debt and liquidation of short-term debts future...
...However, in 1982, Mexico virtually went under, initiating what would be the deepest and most prolonged debt crisis in Latin American history...
...By far the greatest losers in the Mexican crash were domestic taxpayers who have had to carry the burden of paying off the $22 billion U.S.-IMF bailout loans, the nearly $100 billion service on the old outstanding foreign debt and the $40 billion government bailout of Mexican commercial banks...
...Moreover, the Mexican crash immediately provoked an international financial crisis as investors began the Zapatista uprising, Mexican financial institutions held about rves...
...The first substantial increase in external indebtedness came only after 1960 as loans were taken mainly for infrastructure programs and financial stabilization...
...However, the payment schedre cur- ule for the next few years is still awesome.31 The result invest- is that Mexico remains mired in a vicious debt trap maklg to a ing it necessary to transfer a huge volume of funds ter and abroad which could otherwise be used for productive sporta- domestic investment...
...These foreign loans were attractive for Latin American governments since they tended to carry relatively low interest rates and extended timetables for repayment...
...Treasury guarantee...
...The accord was based on the exchange of the old bonds for new so-called Brady bonds, which were Mexican long-term debt instruments but with a U.S...
...Much of the money that banks again began to pour in was actually that of Mexican plutocrats market...
...Morgan issued a huge $6 billion floating rate ame as note on behalf of the Mexican government in order to he U.S...
...It issination of presidential candidate Luis osio on March 23 that provoked wealthy foreign investors to take over $10 billion ntry in a few weeks...
...Among the most aggressive operators in international markets was the conglomerate ALFA, which took more than one billion dollars of loans, mainly with U.S...
...who had stashed away billions of dollars in the United Accordin States and in off-shore banking accounts...
...However, neither the Finance Ministry nor the Central Bank publicized the true levels of hard-currency reserves, nor the fact that the government was so deeply in debt...
...The bubble built up in the Mexican stock exchange continued to attract money from the United States as a result of the stability of the exchange rate, carefully nurtured by the ntral Bank and the Finance Ministry...
...We must begin to world, deal with these crises well before the danger of collapse obably is imminent...
...A journalistic account of the 1987/88 negotiations between the Mexican negotiating team and the U.S...
...In the years 1992-1994, a consid- authorities m erable number of medium-sized Mexican companies tion and hand and banks entered the fray, taking advantage of the low director of interest rates in the industrialized countries, particularly Minister of States and Japan...
...6 After the U.S...
...The most detailed analysis of the origins and implementation of the Brady bonds can be found in William Cline, International Debt Reexamined (Washington: Institute for International Economics, 1995...
...The net result was a limited discount of the total capital owed to banks and a drop in debt-service payments.10 The Mexican debt restructurings reflected the success of the alliance of the IMF, the U.S...
...monopoly, Telmex, bought by a syndicate of investors Mexican Cer headed by Carlos Slim Held, a Mexican financier who that apparent has subsequently become the richest man in Latin fundamentals America.13 Other privatized firms included several huge lated a comr steel mills, more than a dozen sugar refineries, the result of the DINA bus-manufacturing company, some 20 agroindus- investors but trial companies and many mining enterprises formerly The deficit w owned and run by the state...
...The Central Bank bought back some $2 billion in tesobonos in the first two weeks of December, stimulating private On January 1, the day of financial agents to follow suit...
...Much thought and analysis must :o, this therefore be devoted to new strategies to reduce the multi- impact of that volatility...
...2 4 Inbursa...
...Its military forces remained small...
...In fact, wealthy Mexican investors who bought huge quantities of these instruments with pesos in the weeks before the devaluation made enormous profits afterwards as the peso value of these peculiar securities doubled...
...help pay off the debt owed to the U.S...
...The main public-debt instruments of the Mexican government in 1993 were still Treasury Certificates (CETE) which were payable in pesos...
...they got their funds back in dollars...
...And state development went heavily into the international debt g to the IMF, Mexico, between 1990 and :d $91 billion from abroad, or "roughly one t inflows to developing countries...
...This amount rose to nearly $30 billion until the Colosio assasfell to under $20 billion...
...second, the Mexican stock market has become an important vehicle for attracting foreign loan capital...
...For example, Jorge Castafeda, The Mexican Shock (New York: The New Press, 1996...
...And lives of subsequently, over $15 billion worth of Mexican debt e huge debt service requires large annual ents to the United States, Europe and Japan, ile at the same time, internal demands for tment stimulate a large flow of new foreign loans to Mexico...
...But stability was not based on solid economic , for in the early 1990s Mexico accumunercial deficit of over $100 billion as a overvalued peso which attracted portfolio crippled the country's export industries...
...2 8 Mexican private and public banks have also taken on a large amount of foreign debt nomic in the last year and a half...
...Subsequently there was no alternative but to allow for a complete devaluation, which provoked a free fall of the peso...
...74, No...
...Some observers, for examhat the January 1st Zapatista rebellion in a major impact on Mexican financial marin fact, was not the case...
...The political and economic pressure was thus allowed to build until the change in presidential administration in early December...
...The best known of these programs, the Brady Plan, made limited debt reduction and U.S.-IMF loan guarantees available to countries adopting rigorous neoliberal reforms...
...To consider how these new circumstances may affect the Mexican economy, social relations and politics in the near future, and whether new debt crises are likely to recur, we must first examine why the the foreign debt has grown so rapidly over the last 30 years, provoking extreme and perverse fluctuations in the national economy...
...Promoting electrical expansion was also a major government priority under the administrations of presidents Luis Echeverrfa (1970-1976) and Jos6 L6pez Portillo (1976-1982), which led the external obligations of the public electricity corporation, CFE, to rise from $990 million in 1970 to over $8.2 billion by end of 1981...
...banks...
...Treasury, and the )uring the 1970s, the amount of capital ailable for loans in international financial :ets increased dramatically as a result of the :ycling of petrodollars and the prolonged European recession...
...Such financial sacrifice helps explain why the Mexican economy has been so severely depressed in the last years, with an 8.5% decline in GNP in 1995, rough 1994, investors sold their peso holdings and bought dollars...
...Treasury and the IMF were rather dramatically informing investors and bankers worldwide that stability was preferable to a prolonged international financial crisis...
...A detailed overview is found in Rosario Green, La deuda externa de Mexico, 1973-1987: De la abundancia a la escasez (Mexico City: Secretaria de Relaciones Exteriores/Nueva Imagen, 1988...
...7 Of this l1 investment amounted to $61 billion while ment was only $16.6 billion...
...Much of the ng in from abroad went into the Mexican , to the tune of at least $22 billion, stimulating a boom on the domestic stock exchange that created an aura of economic prosperity that was reflected in the excessively optimistic attitude of both the government and the financial press...
...However, they had to make considerably larger commitments in the crisis of 1995, which helps explain the recent IMF Th decision to double the fund of special paym drawing rights which can be made available for financial crises in the wh future...
...The initial stages of what would become the Brady Plan had been negotiated by President Miguel de la Madrid (1982-1988), but the new debt program was actually put in place by his successor, Carlos Salinas de Gortari (1988-1994...
...The first country to fall was Mexico, which de a temporary suspension of payments in August, Its total external debt at this point was $87 bill: which almost $60 billion was public-sector del billion was private-sector debt and $8.5 billic commercial-bank debt...
...He is the author of A Century of Debt Crises in Latin America (Princeton University Press, 1989...
...5. The details are in Quijano, Finanzas, pp...
...Treasury to liquidate the emergency loans of early 1995, winning the applause of the Clinton Administration for having fulfilled its financial obligations ahead of schedule...
...In March commercial banks provided $5 billion to Mexico and in June the Paris Club advanced another $2 billion in the way of commercial credits...
...As a result, financial markets did not have adequate data to evaluate the true monetary situation of the country, a fact which contributed to speculation...
...There was clearly a severe information problem which neither the IMF nor the World Bank had resolved...
...Literally hundreds of U.S...
...international private banks in imposing rigorous debtservice payments and initiating a dramatic market-oriented restructuring of the Mexican public sector, including the privatization of state enterprises and the liberalization of foreign trade...
...Again, William Cline, International Debt Reexamined is the basic source here...
...2 2 Through 1996, Mexico has paid over $14 billion to the U.S...
...It was only after the crisis in early 1996 that the Bank of Mexico published a detailed report on dollar reserves during the key year of 1994: see Banco de Mexico, Informe Anual 1995, March, 1996 19...
...8. Secretaria de Hacienda Deuda externa...
...During the 1990s its rate of growth has accelerated, and its character has changed markedly for three reasons, all of them related to the process of financial globalization...
...2 7 In the case of Mexic included private as well as public debt...
...See Graph 2.] Although the new debt was nominally considered an internal obligation, in practice it was simply a new form of very short-term external debt...
...By November, the re( key actors had reached agreement on an $8 billion package-approximately the sum Mexico needed to service its debt in 1982...
...The bulk of the new debt was now undertaken by Donaldo Col large Mexican companies like Telmex and the cement Mexican and giant, Cemex, which sold stock and bonds abroad as did out of the cot the largest of the recently privatized banks Banamex, At this poil Serfin and Bancomer...
...followed by a slow and difficult recovery in 19' 1997.23 he Mexican financial and eco crisis of 1995-1996 had a s political and historical origin, has been emphasized in this and in numerous other publical On the other hand, it is cle there are some significant parallels between the ci 1982 and 1995, especially with respect to the ii tional mechanism of "lender of last resort...
...This sudden abundance generated tremendous rivalry among international banks to maintain or increase their market shares in the lucrative Third World debt transactions...
...of the commercial banks...
...According to a recent issue of the journa Finance, over $77 billion in Latin American stoc bonds were placed on international capital mar 1996, a historical record...
...Moreover, since the majority of the bonds issued were guaranteed by the public sector, it was presumed that the Mexican government would not consider a suspension of payments...
...Treasury, James Baker and Nicolas Brady, served as the basis for a more long-term resolution of the Mexican debt crisis in 1988...
...El Financiero, January 29, 1997...
...Indeed, accordin recent study: "Just to cover pent-up demand in wa sanitation, telecommunications, power and tran tion, Latin America needs to invest $60 billion ea( for the next six years, about $1 billion each week This demand helps to explain why despite the of the Mexican crash, capital flows to all American nations were renewed with a vengea 1996...
...International Monetary Fund, International Capital Markets, August, 1995, p. 53...
...In fact, if the volume and volatility of con' rary financial flows are a reliable guide, it would that these cyclical trends will be intensified in the Most Latin American domestic savings rates a rently low, and the demand for foreign sources of ment capital is therefore high...
...It also helped the state-owned development ar that banks to obtain over $600 million internationally...
...2 9 rises of The most important external debt operations, hownterna- ever, have been those carried out by the government in actors order to pay off and restructure its external debts...
...Less well known, perhaps, is the fact that a Mexican debt crisis erupted in mid-1986 as a re the collapse of world oil prices...
...Nonetheless, the total loans disbursed initially were not great...
...Without fundamentally new bonds strategies, we will soon be facing even graver debt ex, for crises than those of the recent past...
...7. Data from Jose Angel Gurria, La politica de la deuda externa (Mexico City: Fondo de Cultura Econ6mica, 1993), and Secretaria de Hacienda, Deuda externa p~blica mexicana (Mexico City: Fondo de Cultura Econ6mica, 1988), Final Appendix...
...The impact of the Mexic sis on international finance was dramatic and at the IMF-World Bank meetings in September, 1982 there was talk of a possible panic on world [ markets...
...Another important set of public enterprises seeking foreign finance were the state banks, being led initially by National Financial Bank (NAFINSA), and surpassed in the late 1970s by the National Bank of Public Works (BANOBRAS), the National Bank of Foreign Trade, and the Rural Credit Bank...
...In the case of Mexico, two public enterprises, Petroleos Mexicanos (Pemex), the profitable state petroleum monopoly, and the Federal Electricity Commission (CFE), the state electrical consortium, took the most loans...
...and the Cormi Credit Corporation and the Stablization Fund of tl Treasury would each provide $1 billion in add short-term funds...
...6. During the 1970s, the important annual information resource of the World Bank, World Debt Tables, regularly underestimated the total growth of public and particularly private foreign debt of Latin American nations...
...See the information in a careful study published in article by Roberto Gonzalez Amador in La Jornada, February 7, 1995, based on analysis of stock exchange and public debt transactions registered...
...Alicia Salgado, "Subi6 a 212 mil millones el costo del recate bancario," El Financiero, January 28, 1997, p. 3. 23...
...Once agai Mexican finance ministry had to advise its bank debt service would probably be suspended an( result, a new multinational financial package wa nized to avoid a moratorium...
...2 During the 1970s, the amount of capital available for loans in international financial markets increased dramatically as a result of the twin phenomena of the recycling of petrodollars and the prolonged European economic recession...
...7 Subsequently, negotiations began to restructu of the external debt...
...nt, Bank of Mexico and Finance Ministry ade some crucial mistakes in the evalua[ling of monetary policy...
...This meant, in effect, that the Mexican government did not have sufficient funds to cover its financial obligations...
...First, the largest private Mexican corporations have increasingly participated in international bond issues...
...9 Finally, following new restructuring agreements with the international commercial banks, a series of proposals made by successive secretaries of the U.S...
...Ceme instance, the third largest cement company in the now has a foreign debt of $5 billion, which pr 96 and makes it the most heavily foreign-indebted private corporation in Latin America...
...9. Secretaria de Hacienda Deuda externa...
...In ns for 1996, J.P...
...These financial obligations, however, were predicated on a relatively stable exchange rate as well as rising export earnings by these firms...
...On the one hand, foreign investors who had invested in the stocks of Mexican companies lost large amounts of money because of the fall in stock prices...
...25 billion in foreign rese The leading financial firms in sination, at which time it Mexico bought an estimated December 20 peso devalue $16 billion in tesobonos in order to cover themselves against devaluation.' 9 They did so largely by placing orders with foreign investors who sold their Mexican securities in exchange for dollars...
...4, pp...
...The total actually disbursed through 1996 was $12.5 billion by the U.S...
...Morgan...
...The explosion of the Mexican foreign debt began in the early 1970s...
...Indeed there is no indication that either Mexico or any other Latin American nation will soon break out of the boo bust cycles which have been accentuated by thi fluctuations in the flows of capital in and out region...
...This set of "neoliberal" policies which were, in part, the offspring of the debt crisis and which were applied in many developing nations came to be known as the Washington Consensus.' 1 Once neoliberalism was generally adopted by most Latin American political and financial elites, it became possible to carry out new programs of financial engineering which could help reconcile debtor countries and their numerous international creditors...
...74, No...
...As Walter Wriston, then president of Citicorp, gleefully pronounced in the midst of the loan boom of the late 1970s: "Countries don't go bankrupt...
...An interesting critique of the Washington Consensus is found in Paul Krugman, "Dutch Tulips and Emerging Markets," Foreign Affairs (July-August, 1995), Vol...
...Incredibly, until 1995, the Bank of Mexico only published reports of levels of hard curency reserves three times a year...
...In 1997 amortizations due on external debt in 1997 will surpass $40 billion, of which 60% is private debt: Banco Nacional de Mexico, Examen de la situacid6n econ6mica de Mexico (June, 1997) p. 240...
...and third, the Mexican government has accumulated a complex series of financial obligations abroad as a result of the economic crash of 1994-1995 and its aftermath...
...The foreign debt of Pemex had stood at barely $367 million in 1970 but by 1981 had surpassed $11 billion, representing 27% of total long-term Mexican public debt...
...Moreover, they were essential to the development of key economic sectors for which it was difficult to obtain private investment--electricity generation and distribution, the development of national telephone systems, the building of modem roads and bridges and the development of infrastructure for the rapidly growing cities of the region...
...Only wealthy Mexicans could participate in this financial gambling since each tesobono cost $100,000...
...It should be underlined that the $13 billion credits extended to Mexico by the IMF between 1995 and 1996 were the largest in the history of that institution...
...On the other hand, it should be noted that foreign investors had made huge profits in the Mexico City market during the years 1990-1993 precisely because As political instability built th the peso was pegged to the The rapid decline of foreign r dollar...
...eserves meant that by the end of the year, they were insufficient nated tesobonos...
...Curiously, however, the relative proportion of public to private debt did not change markedly, averaging slightly over 70% for the public sector and almost 30% for private enterprise during the great loan boom of 1972-1982.' What did change was the supply of funds from abroad...
...nce in The extraordinarily rapid changes that are occurring l Latin in contemporary financial world markets are only :ks and increasing the degree of volatility in the so-called "kets in emerging markets...
...However Serra Puche and Mancera had both made an enormous blunder, and the top Mexican bankers moved in for the kill on the following day...
...As a result, the United States Treasury headed by Robert Rubin organized an extraordinary emergency financial package in February, 1995 which initially involved a guarantee of almost $40 billion dollars for Mexico-the largest sum ever to be provided to one individual country...
...However, as political instability increased in late 1993-and blossomed after March, 1994-Aspe, backed by President Salinas, decided to authorize the issue of large numbers of the tesobonos, allowing holders of CETEs to sell their securities and hedge against the devaluation risk that was emerging but without taking the money out of Mexico...
...Treasury...
...2 5 Perhaps for this reason IMF Director Michel Camdessus described nves the Mexican crash as "the first financial crisis of the twenty-first century...
...Accepting the massive issue of tesobonos was perhaps the most serious error committed by any finance minister in the history of modern Latin America...
...The details are in the book written by the government functionary in charge of supervising the privatization process: Jacques Rogozinski, La privatizaci6n en Mexico (Mexico City: Trillas, 1997...
...in Mexico the external debt stood at $2.3 billion in 1964, increasing to $6.0 billion by 1970...
Vol. 31 • November 1997 • No. 3
