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1982 Mexican Financial Crisis
© 1982, 2001 Donald J. Mabry
The purposes of this presentation are limited
just as its contents are tentative. One goal is to outline the chronology of the Mexican
financial crisis By doing so, it may help one,understand better what has happened in
Mexico in 1982. The other purpose is to suggest some of the consequences of the crisis for
the United States. Mexicans will pay the greatest price for the fiscal mismanagent by and
greed of a few but U.S. citizens will also pay.
One fundamental problem for the Mexican economy
is that it is a satellite of the United States economy. Mexico is the third largest
trading partner of the United States, which buys over 65% of Mexico's exports and accounts
for a similar percentage of Mexico's imports. Tourism from the United States and border
transaction produce billions of dollars for Mexico even after subtracting the large
amounts spent by Mexican tourists in the United States Remittances by Mexicans working tn
the U.S. contribute more billions to the Mexican economy. More subtle, perhaps, but of
critical importance to the financial crisis is that Mexico borrows extensively from US
citizens.
The US economy has been sick and the germs have
spread southward with a marked virulence. Mexico has caught pneumonia from the US head
cold. The US recession eventually caught up with Mexico, which had previously countered
international trends in 1977-1981 by increasing its gross domestic product by an average
of 7% a year. As interest rates rose, money supplies contracted, inventories grew, and
unemployment increased in the United States. The US purchased less and charged more for
its exports. The cost to Mexico of imports and capital increased sharply while the value
of its exports fell. For more than a year, the prices of petroleum, silver, coffee,
cotton, copper and other important Mexican exports declined. In 1981, for example, Mexico
projected some $20 billion in oil revenues but received about $12 billion. This year
brought similar short-falls as petroleum prices continued to decline. The value of tourism
to Mexico fell some $900 million. The staggering budget deficit programmed by the Reagan
administration and Congress and the decision of the Federal Reserve System to charge more
for money drove interest rates up (the prime rate went up to 17%) and increased Mexico's
debt burden by some $2.5 billion.
The Mexican government, for its part, had
chosen an economic development strategy which increased its exposure to the ills of the
United States economy. It borrowed extensively from foreign, principally US sources to
finance investments in infrastructure and industry, social services, and debt service. The
projected national budget of 1982 called for 34% of its revenues to come from borrowing.
Mexico gambled that its income from tourism and exports, particularly petroleum, would
enable it to service its debt and that banks, cognizant of Mexico's position as a major
oil power, would continue to rollover the debt if difficulties developed. The very size of
the debt which was approximately $70 billion in January, 1982.and some $80 billion in
October, seemed to demand cooperation from international bankers. After all, the United
States and others had anguished for months about possible default on the Polish national
debt of $25 billion, puny compared to Mexico's.
Mexico lost this gamble, The United States
government raised the cost of dollars to slow down the rate of inflation and, in the
process, inflated the Mexican economy, which depended so much on borrowing. Interest costs
to both. the public and private sectors of Mexico skyrocketed.. In 1978, these charges had
been $2.606 billion; in 1981, they were $8.2 billion. They continued to climb in 1982. The
Mexican economy, already heated up by President José López Portillo's policies,
overheated. By January, 1982, Mexican economists were projecting a 60% inflation rate for
1982. Trying to obtain enough dollars to service the foreign debt became critical.
Private citizens in Mexico had not been as
optimistic as their government and had been taking steps to insure the integrity of their
wealth. They began switching from pesos to dollars. In January, 1982, they had $9 billion
deposited in bank accounts in Mexico; by August, they had converted another $3 billion
from pesos to dollars and stashed them in such accounts. Ninety percent , of the bank
accounts in Mexico were in dollars even though peso accounts paid 23% higher interest.
Less optimistic Mexicans sent money out of the country or never brought it in. By July,
1982, some $14 billion had gone into foreign bank accounts and another $25 billion
invested in US real estate. Some $6 billion was invested in Texas alone and Texas banks
held $16 billion in accounts. It is perhaps no coincidence that the recent downturn in the
Texas economy paralleled Mexico's financial troubles in August.
Mexicans were betting that the peso would be
devalued and, in February, the government did so. On February 17th, the Banco de México
allowed the peso to float; the devaluation that followed eventually amounted to 43%.
Besides stimulating exports, the government hoped that devaluation would slow capital
flight. The government also cut its own spending and put a price freeze on fifty
additional items to mitigate the effects of the subsequent inflation. In March., to pacify
workers, the government granted its employees pay raises ranging from 10-30%, retroactive
to February 18th. Private employers normally follow suit.
The difficulties in which Mexico was finding
itself can be illustrated by the experience of the Grupo Industrial Alfa, the largest
private business in Mexico. This Monterrey conglomerate owned a variety of enterprises
including steel mills, breweries, food processing plants, and tourist facilities, The
company bit off more than it could chew and lost $124 million in 1981 and forecast losses
of $304 million in 1982, considerable amounts for a $1.9 billion company. Alfa had also
borrowed extensively and was having trouble servicing its debt. On April 21st, the company
announced that it was suspending payment on the $2.3 billion debt principal owed to
domestic and foreign banks. On April 30th, its representatives met in Houston with
representatives of 135 US banks to discuss solutions to the debt problem. The February
peso devaluation had increased the company's dollar debt by $140 million, more than it
could bear.
US banks were also vulnerable. Citibank and
Continental Illinois had each loaned $100 million to Alfa. On August 5th, the company
proposed a six-month suspension on 70% of the interest payments on its debt. So, by April,
Mexico's largest private enterprise was close to bankruptcy; its shakiness certainly must
have encouraged capital flight.
The Mexican government continued to cut back
its expenditures but attempted no drastic measures, perhaps because elections were to be
held in July. By the end of April, the national budget had been cut 8%; in May, the
expensive nuclear energy program was suspended. In August, continued capital flight and
shortfalls in dollar reserves forced the government to act. On August 5th, the peso was
again devalued, bringing the total decline in the value of the peso in 1982 to 67%. In
addition, the government created a two-tier exchange system. To pay international debts
and pay for necessary imports, the exchange rate would be 49 pesos to the dollar. For
non-essential imports, the rate would be 69.5 to the dollar. On August 12th, the
government ordered all bank accounts to be paid out in pesos, thus "freezing"
the accounts and eventually recapturing the $12 billion deposited. Trading in foreign
currency was suspended, To offset criticism, income taxes were lowered but the government
also raised the prices of the basic consumer commodities it had been subsidizing, thus
passing some of its financial burden to the consumer. On August 20th, the government got a
90-day extension on repayment of short- and medium term-loans from 115 international
banks. Dollar flight was temporarily halted and the government had bought time to
negotiate foreign banks
President López Portillo took drastic steps to
reorganize the Mexican financial system with one decisive blow. On September 1st, he
nationalized all private, Mexican banks and converted the Banco de México into a
decentralized government agency. Strict currency controls were adopted. The president
accused Mexican financial speculators, aided and abetted by these banks, of having looted
the country and brought the nation close to financial collapse by withdrawing some $50
billion from the economy (the Mexican GNP in 1981 was $120 billion). Henceforth, the
government would control domestic credit, and, of course, the flow of dollars. Some 80% of
the economy was now in government hands, a situation which would force the international
bankers to cooperate with Mexico. On September 6th, Mexico suspended payment on all debt
principal until the end of 1983.
Washington, for its part, has little choice but
to help Mexico. It started helping in August by making a $1 billion advance payment for
petroleum and by arranging a near one bi ion dollar loan from the Commodity Credit
Corporation. Mexico's importance to the US as a trade partner means that the US needs a
healthy Mexico. Congress was considering ways to stop the flow of illegal aliens, most of
whom are Mexican, but any hope of expelling those currently in the US were dashed because
Mexico needed the $4-7 billion they remit each year. Equally, if not more, important for
US policy is the fact that the nine largest banks, in the United States had the equivalent
of 40% of their capital and reserves loaned to Mexico. If Mexico defaulted, these banks
would collapse and other countries might default as well.
The United States has little choice but to
cooperate with Mexico and perhaps there is justice in that. It was US tight money policies
that squeezed Mexico and the bad judgment of US bankers in continuing to loan money to
Mexico that contributed to the crisis.
New president Miguel de la Madrid took office on December 1st and had to clean up the mess
left by his predecessor's irrationality. Most of what López Portillo had done in August
was reversed. Mexico could not continue those policies if it wanted foreign investment.
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