Mexican Handout: Bailing Out the Creditor Class

This selection was originally published in the Nation on 13 February 1995. Walker Todd is an attorney and economic consultant in private practice in Ohio and was assistant general counsel and research officer at the Federal Reserve Bank of Cleveland.


One of the most preposterous financial crimes of the century, the official management of the 1980s developing-countries debt crisis, is being repeated before our very eyes, and by many of the original perpetrators to boot. As this is written, the Clinton administration is pushing, and Congress seems poised to approve, a loan guarantee package for Mexico of up to $40 billion. This is on top of hastily arranged international credit lines worth $18 billion, most of them guaranteed directly or indirectly by the United States and cobbled up since Christmas [1994].

Mexico owes the world about $120 billion (more than $160 billion by some estimates), and about $58 billion of that amount falls due this year [1995]. Hence the need for a total aid package of about $58 billion, although it is not yet certain that most or all of that aid will be drawn upon. One must be exacting and clear about who the principal beneficiaries of a U.S. guarantee of Mexico’s foreign debts would be: Mexico owes foreign–primarily U.S.–investors in stock shares and bonds about $60 billion. Also, about $18.3 billion of the $120 billion total is owed to U.S. banks, led by Citicorp with about $2.9 billion. With the peso down in value by one-third and Mexico’s dollar reserves dwindling, it is clear that only a mammoth infusion of funds or forgiveness of its debts can prevent the country from defaulting.

The original crime, now being repeated, was the profligate lending of billions of dollars from the U.S. banking system between 1974 and 1982 to as gaudy a band of tinpot military dictators, kleptocratic presidents, and bon vivant finance ministers as ever graced a Connecticut Avenue diplomatic reception, followed in August 1982 by the discovery that the borrowers either could not or would not repay the money. But it was not practical politics to recognize the stupidity of the situation and call the lenders into account. No, orthodoxy and good form required the ongoing pretense that the loans were still good, with a host of jerry-built solutions from the Treasury, the Federal Reserve, the International Monetary Fund, and the World Bank. So, as an African economist once told me, “One class of people borrowed the money, and a different class of people had to pay it back.”

The IMF-policed austerity regimes that were used to keep the loan money flowing (usually only enough to pay the interest; the principal was rarely reduced) became legendary in developing countries during the 1980s. What did governing elites or international financial diplomats care if the vanishing middle classes and teeming poor of the Third World paid the price of “adjustment” while the lifestyles of the rich changed not at all?

In 1982 Mexico owed U.S. banks about $25 billion. The dirty secret of Debt Crisis I was that foreign banks had deposits of flight capital from rich residents of the debtor nations that would have covered much (and in some cases all) of the banks’ claims on the debtor countries. But despite the price paid for “adjustment” by the middle classes and the poor of the developing countries, not to mention the price paid in lost export sales to those countries by U.S. manufacturers and farmers in the heartland, the names of the thieves and the amounts they stole were never disclosed.

Now, by devaluing the peso, Mexico has again committed moral (if not technical) default on its dollar-denominated obligations. This is the principal legacy of the administration of former president Carlos Salinas de Gortari and his supporters in the U.S. establishment. It is doubtful that Mexico can meet its external obligations during 1995 without either debt relief (always the right answer in international lending problems involving developing countries) or new loans from First World governments and banks (the establishment’s preferred solution). After the lost decade of the 1980s, relieved only briefly in the early 1990s by the North American Free Trade Agreement financial bubble, the Mexican people find themselves once more confronting official demands for renewed austerity, quiet acceptance of further reduced wages (now approximately 60 percent below 1980 levels in inflation-adjusted peso terms), reduced possibilities for immigration to the United States to escape poverty, and diminished prospects for renewed growth of the Mexican economy for the forseeable future.

But here is where the truly intolerable part begins again: The governing elites in both countries who caused, exacerbated, or covered up this mess expect to escape censure, just as happened in 1982.

Secret credit lines for Mexico from the United States, Japan, and European governments amounting to as much as $12 billion were negotiated twice in the past fifteen months or so, ostensibly to defend the peso, but it is now clear that the only possible use of those lines would have been to finance the flight from the peso of Mexico’s governing elites and their compatriots in the international financial system. Amusingly, through a tripartite credit line involving Canada as well as Mexico, which was announced publicly in April 1994, the United States essentially has agreed to lend Canada dollars that Canada can then lend to Mexico, which further weakens the U.S. dollar. Our own creditors now understand that we have underwritten the foreign debts of our two neighbors. Federal Reserve chairman Alan Greenspan was an active promoter of those credit lines, as well as the current bailout effort.

The principal purpose to be served by the new Mexican bailout package is to prevent a loss of confidence of foreign investors in a host of other developing nations, such as Argentina. But this is a silly exercise, a true confidence game, because now no rational investor could have faith in Mexico’s governing Institutional Revolutionary Party (PRI), which has enjoyed so much official U.S. support in recent decades. The Banco de Mexico, the country’s central bank, was still intervening in the Mexico City stock exchange and rigging (treasury bill) auctions in the same week that the bailout package was presented to Congress, a clear indication that stability has not returned to the country’s shaky financial markets. Also, if other countries have mismanaged their financial affairs and are courting disaster for their currencies, there is not much that a bailout of Mexico can do to restore investor confidence. Besides, the prospects for repayment from future Mexican oil receipts, for example, are somewhat limited: At current oil production and price levels, the gross export receipts for Pemex, the national petroleum company, are only about $8.5 billion per year, and most of that has already been pledged to other purposes. The time is long since past in Washington for a repetition of the Paul Volcker-directed “lend new money to meet the interest payments and pretend that it is all still good debt” strategy of the 1980s.

Dissent has broken out in both the Republican and Democratic Parties over various aspects of the bailout. A variety of extraneous conditions are being proposed to sweeten the deal: demands that Mexico loosen its ties to Cuba and crack down on illegal immigrants to the United States (red meat for the right) and calls for stronger enforcement of labor and environmental protections (for the liberal left). But at bottom what is needed is a prompt and full disclosure of what the $40 billion will be used for. The names and amounts paid for each disbursement under the credit line should be published. If there are Charles Keatings, Ferdinand Marcoses, and M. Danny Walls lurking, the public is entitled to know who they are and what they intend to do with the money they receive at our expense. And if the names disclosed prove to be those of prominent Mexicans and U.S. banks, securities firms, mutual funds, and pension fund managers, then we should know that, too. Who knows, with enough disclosure, maybe no one would step forward to claim the money. But don’t count on it.

Unfortunately, no new U.S. loan guarantees administered by the existing PRI government can foster real stability in Mexico. And support for the side agreements to NAFTA misses the point entirely. Dissenters in Congress should insist on complete institutional and financial reform of the Mexican government, which might then do more to address labor and environmental concerns from an authentic Mexican perspective, not merely as a PRI concession to the United States. The PRI has forfeited all moral authority to govern. President Ernesto Zedillo Ponce de Len should invite the two main opposition parties to join his Cabinet on a full power-sharing basis, with all the important Cabinet ministries going to the opposition. The PRI itself should be dissolved.

To combat the PRI’s almost unnatural hold on the affections of many of Mexico’s uneducated poor, truth commissions independent of the PRI, such as those used in Chile after Pinochet, should be established to investigate matters such as the use of foreign credit lines by the Banco de Mexico, the massacre of student demonstrators in Mexico City in 1968, the manipulation of the 1988 election results, the responsibility for the assassinations of Luis Donaldo Colosio (first presidential candidate of the PRI) and Jos Francisco Ruiz Massieu (second-ranking PRI official) in 1994, and the murders of journalists and opposition activists under Salinas. Also, a separate inquiry should be mounted into the influence of drug runners and money launderers in Mexican public life, as well as their connections to foreign intelligence services.

As for Washington’s pending actions: It once was a federal felony under the Johnson Act for any person subject to U.S. jurisdiction to lend money to a foreign government in default on its loans from the United States. After 1945, however, the act was amended to accommodate the formation of the Bretton Woods institutions. Only international financial “outlaws” like the former Soviet Union and China were excluded. Then, in 1992, during the euphoria over market openings in Russia, the Johnson Act was quietly amended further to exempt from its prohibitions former Soviet-bloc countries that were not yet members of the IMF and World Bank, establishing the principle that even outlaws may now borrow money in international financial markets. This is too bad, for as the crimes of 1982 are repeated, this time we lack a good felony statute with which to punish the miscreants.

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