Last August, Mexico ran out of
foreign exchange to service its
huge external debt and pay for im-
ports. The government had to re-
quest emergency loans from West-
ern governments in order to avoid
ers for a three-month moratorium
on the $10 billion due in principal
payments. An extensive rescue op-
eration was quickly undertaken by
Western central bankers and gov-
ernments in return for Mexico’s
promise to work out an austerity
plan with the International Monetary alone.
Fund (IMF). To discourage capital “I can affirm,” said former Presi-
flight, exchange controls were dent Jose Lopez Portillo, “that in re-
implemented for the first time. cent years a group of Mexicans led,
Mexico’s problems did not arise counseled and supported by pri-
overnight. 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. A precarious sit-
uation turned into an acute crisis
once wealthy Mexicans and for-
eigners started taking their money
out of the country by converting it to more stable currency. According to Creative Financing To The Rescue conservative estimates, they have
deposited $14 billion in Eurobanks,
$12 billion is held in foreign cur-
rency 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.”
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 uncontrol-
lable drain of foreign exchange. 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 so-
cialism.”
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. banks, at
least for the period of acute crisis.
Despite their philosophical commit-
ment to private ownership, the view
of many U.S. 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.”
The Bank of America has $3 billion
in loans outstanding to Mexico.
Claudia Dziobek is a German econo- mist who is preparing her dissertation,
“International Commercial Bank Lend-
ing to Third World Countries in the
1970s,” at the University of Massachu-
setts at Amherst.
NAC AReport
Tourists in Mexico City change dollars for pesos after the government temporarily suspended dollar trading in August.
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. Luis Jose Dorantes, head of
the Labor Congress, applauded the
decision to allow bank employees
to unionize.
In Mexico, the bank nationaliza-
tion is not as radical a step as a sim-
ilar act would be in the United
States. Even before the takeover,
the public sector accounted for
50% of the nation’s gross domestic
product. And half of the Mexican
banking system had been trans-
ferred to the public sector in the mid
seventies. The effectiveness of
government control over the banks
in containing capital flight and ad-
ministering the debt restructuring
Jan/Feb 1983
remains to be seen. Said one
banker, “Many of those who are
taking dollars out of the country
were in Congress hypocritically ap-
plauding the President’s decision.”
Creative Financing
Breaking with established tradi-
tions, 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. The
Mexican collapse was the sleeping
giant that nobody was prepared to
confront. Billions of dollars were
poured into the country under a va-
riety of quickly fabricated methods,
referred to as “creative financing”
by the bankers. It included such
novelties as paying for Mexican ex-
ports before they had even been
produced.
The resources made available in-
cluded:
* $1.85 billion through the BIS, the
central bank of the central banks,
half of which was to be provided by
the U.S. Federal Reserve;
* $1 billion in advance payments
from the U.S. government for oil de-
liveries for its “Strategic Petroleum
Reserve”;
* $1 billion in loans guaranteed by
the U.S. Commodity Credit Corpo-
ration to finance food exports to
Mexico;
* $300 million in prepaid oil ship-
ments from Spain;
* $4-5 billion from the IMF to re-
place the BIS loan as soon as the
IMF had raised the money and
agreed on the terms of an austerity
plan with Mexico.
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.
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 sup-
port from the Fund and few if any
concessions from the banks. In
1976, for example, Jamaica was
forced to get by without any new
foreign exchange loans until the
IMF mission could detect “evi-
dence of economic recovery.”
Clearly Mexico’s case was excep-
tional. Bankers viewed it as a
serious threat to the stability of their
own existence and of international
financial markets.
“Gang-Up” Possible?
Currently about 15 third world
and Eastern European countries,
heavily indebted to private com-
mercial bankers, are in serious fi-
nancial troubles. Their reschedul-
ing agreements involve economic
adjustment programs lasting sev-
eral years. Many of these countries
continue to be in deep economic
austerity (and most probably be-
cause of it). Turkey, for example,
has rescheduled its $3 billion debt
owed to private banks three times
in a row and is currently requesting
another rescheduling.
Traditionally, bankers have in-
sisted that debt-servicing difficulties
are due mainly to mismanagement
and corruption rather than struc-
tural constraints and the world re-
cession faced by countries through-
out the developing world. Before the
Mexican disaster, to prove their
point bankers cited Brazil, Mexico
and Argentina as examples of heav-
ily indebted third world countries
“competently” managing their
economies and external debts.
With Mexico insolvent, Brazil ac-
cepting 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, open-
ing the possibility of a “gang-up”
against the banks. Previously at-
tempted 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*, re-
frained from demanding debt relief
from any of their creditors. 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 IMF was
to Mexico what welfare is to the
middle class.
The bankers’ insistence on rigid,
IMF-supervised austerity programs
have provoked protests, riots and
deep resentment throughout the
third world. This includes not only
workers and peasants but politi-
cians and some industrialists as
well. Externally imposed, IMF pro-
grams are seen as public humilia-
tion. International bankers now des-
perately try to avert the obvious
conclusion, namely that a common
solution to the third world debt
crisis is necessary.
Ball-Out of the Banks?
More than two-thirds of Mexico’s
debt is owed to private banks. U.S.
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. A
loss of the loans outstanding to
Mexico would be disastrous. Citi-
bank, for example, is reported to
have loaned 50% of its capital base
to Mexico, making it highly vul-
nerable.
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. The group now includes over 120
countries.
ture of the financial markets’ stabil-
ity, quick action to sweep the Mexi-
can problem under the carpet, or at
least make it look “manageable,” is
of prime importance. Bankers have
made public “no cause for con-
cern” speeches a regular institu-
tion. In an article called “Banking
Against Disaster,” Citibank Chair-
man Walter B. Wriston stressed
what he saw as the positive side of
the disaster. “One by one, those
countries are finally breaking
through the vicious circle of pov-
erty. This is a new and positive de-
velopment, and one which gives
great hope for the future of the de-
veloping countries in the remaining
years of this century.”
The new loans to Mexico were
put together by the United States
and Western European govern-
ments and central banks. Private
banks held off and waited for gov-
ernment action before attempting
to raise new funds for Mexico them-
selves. Given the country’s poor
credit rating, raising new funds in
the Eurodollar market would be dif-
ficult. Bankers would have a hard
time convincing potential deposi-
tors to invest their money in a bail-
out operation for Mexico.
Central banks and governments
were then forced to jump in, using
taxpayers’ money for the rescue
operation. 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. Central bank-
ers are eager to deny such
charges. “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.
“There is no way we can lend of-
ficial money to Mexico so that it can
repay the banks.”
Yet actually imposing sanctions
against the banks may be difficult.
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.
Bankers will insist on Mexico meet-
ing interest payments. Otherwise
they would have to write off the
loans as losses which would bring
several U.S. banks to the brink of
default. With Mexico out of foreign
exchange, the obvious conclusion
seems to be that interest payments
are being taken directly from dol-
lars flowing in from the IMF or U.S.
taxpayers.
Rescheduling Private Debt
Private bankers agreed to a re-
structuring of the Mexican debt pat-
terned after rescue operations for
other third world countries. The
Mexican plan includes an IMF-ad-
ministered austerity program
aimed at increasing exports and
thus foreign exchange earnings
through devaluations. The scheme
is also designed to cut internal
spending by curtailing the govern-
ment budget and lowering real
Jan/Feb 1983
wages. New taxes will be imposed,
charges for public services will in-
crease and 106 out of 740 state-
owned companies and govern-
ment agencies will be closed.
Though they had called for 50%
wage hikes, workers in some in-
dustries cancelled the strikes they
had threatened. Faced with the al-
ternative of unemployment (with no
benefits), workers settled for a pay
raise of 12%, far below the 100%
inflation rate. If the country com-
plies with the policies prescribed by
the Fund and continues to service
its external debt (without contract-
ing new credits), banks will stretch
out the debt and the IMF will grant
support loans.
In most cases of reschedulings,
private bankers do not lose a
penny. Funds made available by
the debtor country through the aus-
terity programs are used to con-
tinue servicing the debt. The inter-
nal “savings” are complemented
by foreign exchange infusions from
the IMF. This mechanism works
even in times of slow growth inter-
nationally and negative growth in-
ternally.
Theoretically, the squeezing out
of internal wealth and income to
make it available to the foreign
creditors would best be accom-
plished by taxing the rich, cutting
imports of luxury items and limiting
the amount individuals may hold in
foreign exchange accounts. But in
practice, wage cuts and cuts in vital
imports-both disruptive of the
whole economy-are usually the
primary source of funds. Addition-
ally, prices of export items such as
oil are raised internally to discour-
age consumption, freeing up the
items for export. However, this
does not always work well, particu-
43update * update . update e update
larly in times such as now, when oil
is cheap and there is a wave of pro-
tectionism in the Western world.
Cambridge Versus Chicago
IMF officials derive their wisdom
from the University of Chicago
economists who teach how to cure
through bloodletting. An alternative
cure is suggested by Mexico’s ad-
visers from Cambridge University
who adhere to more humane-and
reasonable-theories. Mistrustful
of the “free market” solution, Cam-
bridge supported exchange con-
trols and strict monitoring of im-
ports to ensure that only crucial im-
ports were given priority. Addition-
ally, 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.
In every way, this is a more rea-
sonable long-term plan of action.
But the IMF does not allow for ex-
perimentation. That third world
economies are usually set back
decades in their development by
the austerity programs is not of
consequence. Maintaining “per-
forming loans”-the term for loans
being serviced-on the banks’
balance sheets seems to be a
higher concern.
Political Disaster
The IMF austerity program that
Mexico is agreeing to will not easily
be implemented. It will no doubt
bring intensified social tensions.
Unemployment or underemploy-
ment is already estimated at 45%.
Almost one million workers were
sent home in the first eight months
of 1982. Devaluations will acceler-
ate inflation as imported goods get
more expensive. This in turn will
cause real wages to fall, which will
not be accepted easily. Devalua-
tions will also mean the curtailment
of some imported goods.
PEMEX, the state-owned oil
giant, said it planned to fire 10,000
workers by the end of the year.
ALFA, the biggest Mexican con-
glomerate built around the steel in-
dustry, is laying off one-fifth of its
employees and has to sell off half of
its assets to avoid worse measures.
With an economy structured so that
imports are crucial to most indus-
tries, disruptions will be felt in many
production sectors. 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.
Given this outlook, the imple-
mentation of IMF policies may be
politically impossible to carry out
even for a pro-Western leader such
as President Miguel de la Madrid
Hurtado. The execution of drastic
cutbacks is not simply a technical
problem to be solved by budget
specialists. 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.
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