Mexico’s Public Debt and the Mexican RTC

Mexico's Public Debt and the Mexican RTC

by Ricardo Valenzuela

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Roberto Valenzuela Ricardo Valenzuela, cobachi@azstarnet.com , left Mexico, his native country, after "years of frustration, pain, disappointment, and the feeling of impotence" to do something about what he witnessed in Mexico after college days in the early 1970s . During that decade in Mexico socialism was, he says, "in high gear."

For the last 50 years, Valenzuela says, "the Mexican revolution had been acting as the role model for the development of our country, and Mexico was still part of the third world, a very poor and underdeveloped country. Mexico had been struggling between free market and socialism through what they call mixed economy, the worst of the economic recipes." Like the rest of Latin America, he says, Mexico has been kept in the Stone Age by corrupt politicians applying Keynesianism, socialism, populism, and statism. He did not approve of either the nationalization of Mexico's in banks 1982 or what happened after they were reprivatized in 1991, which led to a huge, unsound expansion of credit.

Mexico has one of the most liberal bank regulatory environments in Latin America. Because Mexican deposit insurance reduces depositors' incentive to carefully pick and choose among banks, a moral hazard existed that bankers succumbed to. Making it worse when borrowers defaulted was the fact that Mexican law makes it difficult and expensive for a bank to seize collateral.

The Mexican peso collapsed in 1994. Subsequently, there was an explosion of bad debt, triple-digit interest rates, and rising inflation. To avoid a massive run on a banking system plagued with a substantial amount of bad debts arising out of self-dealing and fraud, the government in March 1995 established the Banking Fund for the Protection of Savings that is known by its Spanish initials: Fobaproa. Fobaproa is the equivalent of the United States' Resolution Trust Company.

Currently, Mexican President Ernesto Zedillo is seeking to deal with the rising cost of Fobaproa by converting its bad debts into public debt. Proponents claim that if this is not done the banks are likely to be subject to a run that would cause the Mexican economy to collapse. Because Zedoillo's political opponents believe that Fobaproa was created in order to bail out the owners' of banks at the expense of the general public, many of whom are desperately poor, they are outraged over this proposal.

Valenzuela's family lost the bank it owned when the government took over the banking system in 1982, and it lost money when the government decided to convert its dollar deposits into pesos. In addition, his family lost 70,000 acres of fine cattle land in the Northern Mexico when the government decided to give it to ejidatarios (poor peasants).

He thought his dream for Mexico had come true when Carlos Salinas became President in December 1988. The country, he says, was in ruins when Salinas took office. GDP had been shrinking for a decade. To bring about recovers, "Salinas started a bold program of privatization, fiscal responsibility, supply side policies, unilateral free trade, an aggressive fight against inflation, tight monetary policies, etc., with the help of new young public officials, who had a new vision of the country....The results were amazing:" inflation was controlled; foreign investment increased; a budget surplus was achieved; and an opposition political party was able to participate in the political life of the country for the first time since the Revolution.

Valenzuela was a supporter of Luis Donaldo Colosio, a college classmate who, like Valenzuela, was from Sonora. Colosio was assassinated while campaigning to succeed Salinas. Valenzuela believed Colosio was the man that Mexico needed to lead a much needed economic, political, and social transformation of Mexico.

U.S./Mexico Border

Today, he believes, we are witnessing in Mexico "...the demise of the old, autocratic, corrupt, mercantilist system. We are witnessing the death of what Vargas Llosa called the perfect dictatorship."

Valenzuela is the Chairman of the Free Latin America Association in Tuscon, Arizona.

-- The Editor

Mexico's Public Debt and the Mexican RTC

by Ricardo Valenzuela

President Zedillo has sent to the Congress of Mexico proposed legislation for approval of a Mexican version of the RTC named: Fobaproa, the strange organization that the Mexican government set up after the collapse of the Mexican economy and its banking system. If it is approved, this legislation will convert the 70 billion dollars of bad bank loans now on the books of Fobaproa to public debt; thus making the privatization of Mexico's banks one of the big lies and failures of the century.

The opposition forces in the Mexican Congress have vigorously opposed this. Why? Is it because they are libertarians who oppose thus making the state a Santa Claus? No. They oppose this action because of a principle that lies in the origin of the problem. What is the origin of this problem? It lies in back in 1982 during the socialist administration of President Lopez Portillo when, in an act that shames Mexicans, he illegally expropriated the financial system under the pretext that it was to blame for the bankruptcy Mexico was then experiencing. When he announced this action to the people of Mexico, he had the temerity of crying and asking for the forgiveness of those he had dispossessed.

During the following 10 years, the financial system of Mexico became the most abominable source of corruption in the history of the nation. During that period Mexico suffered devaluations of more than 2,000 percent, and inflation reached levels greater than 200 percent; the equity that real bankers had been building for decades evaporated; and the financial system of the country became obsolete and unable to serve a country needing reform.

At the onset of the decade of the 90s, President Salinas began his historic reforms with the privatization of the banks. Unfortunately, a whole generation of bankers had been lost. Also, during that decade that the financial system in the hands of the state, it had been totally destroyed. What Salinas had to offer was only the shadow and the memories of what had been the pride of the financial systems in Latin America.

The yuppies who emerged in the shadow of the manipulations an infant Mexican stock market under the symbiotic protection of a state that used it to issue securities had their heads filled with smoke and their pockets with money. They were immediately attracted to the auction of the banks. This new wave of "financial geniuses" paid ridiculous amounts for the skeletal financial system, paying for it with money from others based on forced loans from the same banks that they were purchasing. They said in effect, "Sign this note, here is your stock, congratulations, you are a new member of the financial elite of the country." In other words, there never was any new capital, as the equity delivered to the banks for their capitalization was liabilities of the stock holders; that is, the banks were never capitalized.

During the following three or four years , the Yuppies administered the banks as their own, old-fashioned brokerage firms, that is, speculatively. They never understood the true function of a serious and responsible banking system. However, I can’t blame them, for they did not know, and had no reason to know, that the bank was in effect a state monopoly.

One of the big political prizes at that time was the presidency of a bank. In December 1994, President Zedillo, pressured by the IMF and the Clinton Treasury, without any basis or foundation, made the senseless decision to accept a devaluation of the peso, thereby provoking the worst national crisis in fifty years. Mexico immediately sank into a deep depression that affected every corner of the country.

The business sector of the country was already suffering from the new openness of Mexico's markets because they were not used to competing. As a result, they were already bleeding. Businesses of all sizes in every part of the nation began a descending spiral toward the abyss of a record number of bankruptcies. Inflation reached 150%, with interest rates greater than 100%. The demand for goods and services decreased by 70%, and the Central Bank was left practically without reserves. The loans applied to the "capitalization" of the banks tripled and quadrupled at the same time that the stocks in banks reached a value of almost zero. The liabilities of businesses, because of their dollar origin or due to the new interest rates, doubled and tripled in size, throwing them into insolvency at the same time that the banks' portfolios lost their value in parallel to the rate of business failure.

When the results of their daring strategies begin to emerge with the first bank failures, or rather, I should say, with the recognition of their bankrupt position, because they had been bankrupt since the state began to administer them when Lopez Portillo nationalized them in the 80’s, the Yuppies panicked. So all the yuppies did was put the icing on the cake and push the banks to the precipice, because they were already there.

Now the Yuppies and the State have brought forth the fabulous idea of Fobaproa to rescue the financial system, but, as always, they are marching with someone else’s purse. The Zedillo proposal is to simply weight down the people with the cost of this massacre of the banking system for which the people of Mexico are blameless.

Mr. President, a year a go I sent you a proposal for the sale of Pemex to create a Mexican Bank of Reconstruction and Promotion, specifically as the solution of this problem. It is said that the good heals the bad. So, if Pemex really belongs to the people of Mexico, as has been vociferously promulgated, now is the time to demonstrate that fact. It is not fair for the long-suffering "Don Pueblo" to pay for another one of your forays. It is not fair for "Don Pueblo" to pay extra for your error of December 1994. It is not fair for "Don Pueblo" to pay for the incorporation of the Cabal Peniche into the international jet set; of the "wise" financial schemes of Lankeneau; for the two-year European vacation of "El Divino." (Three of these financial geniuses are now hidden in some paradise after they embezzled money from the banks they acquired.) The political future of Mexico will be determined by how this problem is solved. If, as Zedillo insists, this debt is transferred to "Don Pueblo", the PRI will become RIP, and the next president of Mexico will, very definitely, not be a member of the PRI.

The Mexican left, represented by Cuahutemoc Cardenas and his PRD, are paying the political price for their ambition to control Mexico City, the largest Mafia in the world; one which they wanted to use as their platform for the year 2000. Cuahutemoc met his Waterloo in the Federal District, and his hope to be the next President evaporated. Beside that, the Mexican people already understood that the Mexican left is not the modern left. Cuahutemoc is not Tony Blair; nor is he Felipe Gonzalez. The PRD is not the Labor Party of New Zealand or the Peronista Party of Argentina.

The conservative right represented by PAN continues to lose ground with their moralistic banner; their close ties with the medieval Catholic church; their "socially responsible" market economy; and the internal problems that arose just as they realized that they might have a chance. The only panista that can engage the passion of the people, the true people, Vicente Fox, continues with his rhetoric and his campaign in favor of devaluations, apparently without realizing that this is the origin of a great number of the Mexican tragedies — and that’s where you will lose Vicente, you, my friend, have to understand as I told you in Guanajuato a few months ago that Mexico needs a strong currency, fiscal restraint, and low inflation.

If Zedillo forces "Don Pueblo" [Mr. People] to swallow the excesses of the establishment AGAIN, PRI loses. This is a great misfortune, because the true natural reformers within the PRI: Reyes Heroles, Telles Cruces, Gurrias, the Aspes, and others, are the true libertarians, the ones the country needs, but the party’s old guard continues to ferociously hold on to power and to block the new currents. They just want to go back to the old socialist, statist, mercantilist system. This is the most important struggle in Mexico: reformers against the hard liners conservatives. This fight will continue.

The financial system of Japan in about to collapse, but they are not going to send the bill to the Japanese people, they are looking for a market solution, not with the IMF, which is more poison. So, Mr. President, take on Pemex. Do not burden the Mexican people. Provide a market solution: sell unproductive assets to pay the debts burdening the nation. Do not let opportunity be snatched from 100 million Mexicans by the knavery of a few.

If Zedillo insists and manages to reach his objective of passing the bill to pass the problem on to "Don Pueblo," the country will be ready for a Mexican Fujimori, because if Vicente does not reconsider, and the dinosaurs do not yield, then the prospects for Mexico are very dim.

Perhaps, perhaps, the people of Mexican are as disappointed and fed up with traditional politicians as the people of Peru were when Fujimori came upon the scene, but do we have a Fujimori in Mexico?

NOTES

Zedillo (PRI) also proposes a tightening of regulatory oversight and enforcement; a phase-out of universal bank deposit insurance and reducing the amount covered; and a strengthening of enforcement of debt obligations.

The following is a letter by Valenzuela announcing the creation of the Free Latin America Foundation.

Practically at the threshold of the hallway that should lead us to the last years of this century, to the end of the millennium, the world is still witnessing what could be the most dramatic transformation in history, changes are happening throughout our planet having a common denominator: THE SEARCH FOR FREEDOM. Political, economic, commercial and individual freedom with responsibility.

This soon to expire century has been known by, precisely that, the most flagrant assault against freedom, the creation and development of a series of totalitarian, oppressive and antidemocratic regimes that for decades kept their people attacked, offended, aggravated. Other traditionally free countries, since the 30's depression, experienced a state take over that supposedly would solve all their problems through taxes, controls, rules and regulations, "wealth redistribution". However, at the end of the century, those regimes have been falling one by one. Communism and its derivations like socialism, fascism, centralism, collectivism, statism, etc., are at this point in time remembered as the biggest aberration of the 20th century. For the first time in Latin America, the continent has democratic governments, with the sole exception of Cuba, so far.

Since the early 80's, Latin America started a dramatic process of transformation towards that direction, the search of freedom; Chile, Argentina, and Mexico took the leadership upon this historic opportunity, and during the last years of the 80's through the early 90's, gave the world a lesson in how to restructure their economies, modernize them, open them to international trade, lower taxes, enter into the democracy game. The effects of such campaigns brought transformations never seen before, and affected the rest of the continent.

Nevertheless, towards the mid 90's, collectivists who had been hiding in their dark caves, started coming out starting a very aggressive counterattack with the intention of regaining lost space. An interesting fact is that those campaigns had a more clear and defined success in developed countries like the U.S., England, Canada, France or in the regression of countries from the former Soviet Union, than in countries of Latin America, where the only step behind, to a certain degree, happened in Mexico, since it is well known that after Colosio's murder, and Salinas exile almost three years ago, the hard liners have emerged as the most serious challengers in the political arena, fighting in all areas, using all tactics and all weapons to achieve their goals, absolute power, the kind of power that ruins everything.

We as apostles of freedom, free markets, and liberalism in the original meaning, have started a special effort to promote our libertarian ideas in a more formal, organized, and especially democratic and open way, creating a forum where all free thinkers could express their ideas, opinions, points of view, where citizens that had not found their space in the political and social process of our continent, had an additional choice, the choice of freedom, and self-direction, the choice of independence.

Over a year ago, we started the required paperwork, with the Internal Revenue Service, in order to solicit the approval for our non-profit organization Free Latin American Foundation, with the purpose of creating a scenario where our supporters could make monetary contributions and receive the appropriate fiscal benefits, creating an attractive tax shelter for our contributors, helping us at the same time to promote and advance our ideas in the fight for freedom and free markets in Mexico and Latin America.

Yesterday, October the 20, 1997, we were notified by the IRS, of the approval of our request, crowning our efforts and opening a door which is interesting, effective and powerful to push our ideas forward. The IRS has not only approved our request, but also congratulated us for the effort and work, extending their support for the well being of our organization. Liberty and free market organizations in the U.S. and worldwide have also shown their support, therefore at this time we can count on financial support of considerable importance for the creation and growth of our center of ideas.

Several important people have been invited to participate as members of our board of Directors and contributors, like Mr. David Ogilvie from Phoenix, Arizona, Tim Jackson from Tucson, Arizona, Guatimoc Iberry from Hermosillo, Sonora, Adolfo Clouthier from Culiacan, Sinaloa, Federico Diaz Gallego from Mexicali, BC, Cesar Cordova from Mexicali, BC, Leif Smith from Denver, Col, and Lirain Urriztieta from Tucson, Az, and Caracas, Venezuela.

In the following weeks we will inform you of our short term plans, we are considering among those plans, organizing, in conjunction with the University of Arizona, a symposium about economic problems in Mexico, with the participation of distinguished panelists like Pedro Azpe (ITAM), Arthur Laffer (Laffer-Canto & Associates), Paul Craig Roberts(The Institute of Political Economy), Steve Hanke (John Hopkins University), Peter Boetke (The New York University), Luis Pazos (CEISLE), etc. Where the past, present, and future of our Mexico will be analyzed as we approach the XXI century. The real effects of free markets policies will be analyzed, as well as the campaigns to destroy and underscore them. We will review what devaluations have really done in our countries, the advance of the old hard-liners in the political scenario etc., etc.

We want to extend our invitation to all friends of freedom and democracy, friends of exploited people by the establishment, the enemies of injustice and misery, to join our civil and civilized effort, in order to promote changes by participating in this war of ideas, in the battle field of ideology, with the weapons of Madero the leader of the Mexican Revolution: the word, righteous, and the truth.

We are extremely excited and satisfied about the latest events, and we want to let our friends, assistants, supporters, and contributors know about our vision and our dream. We also want to affirm our commitment with all Latin-Americans to propel the ideas of freedom, democracy, justice, free markets, free trade, and ethics in politics, so we could witness a continent entering the next century and millennium that is free , just, and wealthier for all peoples in all our countries. A continent that has an efficient, honest, and tight public administration. A continent that makes us proud of being Latin-Americans.

The three largest companies in Latin America are state-owned, and all are oil companies. The second largest is Pemex, Mexico's oil monopoly. According to the Chemical Market Reporter, April 6, 1998, the on-again-off-again privatization of 61 of the State's petrochemical plants may finally take place this year.

In an article in the Economist (December 6, 1997), p. S11, Michael Reid claims that "since the days of the Spanish Conquistadores, the average Latin American has believed that the ultimate source of wealth is in the ground--and that covetous outsiders are forever conspiring to steal it."

The following is from El Informador, Diario Independiente (October 8, 1996):

"MEXICO, D.F. México, Octubre 7 (SUN). - Las autoridades judiciales de España ordenaron la reaprehensión con fines de extradición a México, de Angel Isidoro Rodríguez Sáez, alias "El Divino" _expresidente del Consejo de Administración de Banpaís_. Rodríguez Sáenz se encontraba en libertad provisional bajo arraigo domiciliario en una localidad de ese país europeo. Además, el Gobierno Español concedió la extradición a México de Ricardo Javier Armas Arroyo, exdirector general jurídico de Banca Unión _uno de los hombres mas cercanos al prófugo Carlos Cabal Peniche_ por su presunta responsabilidad en el quebranto bancario de aproximadamente 60 millones de dólares, y por autorizar créditos ilegales por 200 millones de dollares. Angel Isidoro Rodríguez Sáez es acusado, junto con dos exfuncionarios de Banpaís, de haber ocasionado un daño patrimonial a la institución financiera, por un monto superior a los 94 millones 419.000 Pesos, luego de autorizar créditos a dos empresas que carecían de fondos para hacer frente a sus adeudos."

Jorge Lankeneau is he former President of Banca (Bank) Confia.

The Partido Revolucionario Institucional has dominated Mexico since the Revolution. All its presidents since then have belonged to this party. Recently it lost control of the Chamber of Deputies for the first time. Its trouble with voters lies largely in their disgust with its history of corruption.

The Partido de la Revolucion Democratica is the sucessor to the Communist Party in Mexico. In recent years it has moved to the right.

The policies of Partido Accion Nacional, whose strength is greatest in Northern Mexico, lie to the right of those of the PRI and the PRD. In recent years it made history by winning some gubernatorial elections.

Cuahutemoc Cardenas, son of a former Predident of Mexico, broke away from his father's party, the PRI, to form the PRD. Failing to be elected President, apparently due to fraud, he was elected Mayor of Mexico City, which is located in the Federal District (Distrito Federal, D.F).

Vicente Fox Quesada (PAN) was elected Governor of the State of Guanajuato in 1995. He is the former President of Coca Cola in Mexico.

Vargos Llosa is a well known writer who has said that Mexico is a dictatorship of party disguised as a democracy. He was beaten in his attempt to be elected President of Peru by Alberto Fujimori.