The Mexican Debt Crisis and the World Bank

https://portside.org/2019-08-11/mexican-debt-crisis-and-world-bank

Portside Date: August 11, 2019

Author: Eric Toussaint

Date of source: July 22, 2019

Committee for the Abolition of Illegitimate Debt

In 2019, the World Bank (WB) and the IMF will be 75 years old. These two international financial institutions (IFI), founded in 1944, are dominated by the USA and a few allied major powers who work to generalize policies that run counter the interests of the world’s populations.

The WB and the IMF have systematically made loans to States as a means of influencing their policies. Foreign indebtedness has been and continues to be used as an instrument for subordinating the borrowers. Since their creation, the IMF and the WB have violated international pacts on human rights and have no qualms about supporting dictatorships.

A new form of decolonization is urgently required to get out of the predicament in which the IFI and their main shareholders have entrapped the world in general. New international institutions must be established. This new series of articles by Éric Toussaint retraces the development of the World Bank and the IMF since they were founded in 1944. The articles are taken from the book The World Bank: a never-ending coup d’état. The hidden agenda of the Washington Consensus, Mumbai: Vikas Adhyayan Kendra, 2007, or The World Bank : A critical Primer Pluto, 2007.

Robert McNamara and president Luis Echeverria (1970-1976) were thick as thieves. The Mexican president had cracked down on the radical left. From 1973 on, Mexico’s foreign currency revenue soared thanks to the tripling of oil prices. This increase in currency revenue should have prevented Mexico from borrowing. However the volume of WB loans to Mexico rose sharply: it quadrupled from 1973 to 1981 (from USD 118 million in 1973 to 460 million in 1981). Mexico also borrowed from private banks with the World Bank’s backing. The volume of loans from private banks to Mexico multiplied by 6 between 1973 and 1981. US banks led the field, followed in decreasing order by banks from the UK, Japan, Germany, France, Canada, and Switzerland. The amounts loaned by private banks were ten times those borrowed from the World Bank. When the crisis broke in 1982, there were no less than 550 banks to which the Mexican government owed money! Lending money to Mexico was the World Bank’s way of keeping its hold on Mexican authorities. From 1974 to 1976, the predicament of Mexican public finances seriously worsened. Yet the World Bank insisted that Mexico should contract more debts while the alarm signals were flashing.

On 3 February 1978 the World Bank boldly projected a rosy future: “The Mexican government almost certainly will experience a large increase in the resources at its disposal by the early 1980s. Our most recent projections show that … the balance of payments will show a surplus on current account by 1982… large increases in export revenues, mainly from petroleum and products, should make both the foreign debt problem and the management of public finance much easier to manage by the 1980s. The debt service ratio of 32.6% (of export revenue) in 76, will increase progressively to 53.1% en 78, and thereafter will decline to 49.4% in 1980 and about 30% in 1982.” [1] The exact opposite was to occur. Every word of this prediction was contradicted by facts!

In October 1979, when Paul Volcker, then chairman of the US Federal Reserve, decided on a steep rise in interest rates that would inevitably lead to the debt crisis (which was to start in Mexico), the World Bank had reassuring words. On 19 November 1979 we read: "Both the increase in Mexico’s external public debt and especially the increase in the debt service ratio, which in 1979 may become as high as 2/3 of its exports (…), suggest a very critical situation. In fact, the truth is exactly the opposite.” (author’s underlining). [2] This is quite simply astounding.

The World Bank’s message consists of repeating that even when everything suggests there is cause for alarm, actually all is well, the situation is excellent, and you should just contract further debts. What would we think of a crossing-keeper who would tell pedestrians they should cross the railway lines when a red light clearly indicates that a train is arriving? What would a court say if such behaviour had resulted in loss of life?

Private banks of the North loaned exponentially higher amounts to developing countries, starting with Mexico.

One of the Bank’s economists in charge of monitoring the situation sent a most alarming report on 14 August 1981. [3] He explained that he disagreed with the optimistic view held by the Mexican government and its representative Carlos Salinas de Gortari, minister of Planning and Budget. [4] He later had serious problems with his hierarchy, and even decided to lodge a lawsuit against the WB (which he won). [5] In 1981 the World Bank granted Mexico a 1.1 billion dollar loan (scheduled over several years): it was by far the largest loan granted by the WB since 1946. In the early months of 1982 the World Bank still claimed that the increase in the Mexican GDP would average 8.1% a year between 1983 and 1985. On 19 March 1982, i.e. six months before the crisis, the president of the World Bank, Alden W. Clausen, sent the following letter to the Mexican president José Lopez Portillo: [6] "Our meeting in Mexico City with your top aides reinforced my confidence in the economic leaders of your country. You, Mr. President, can be rightfully proud of the achievements of the last five years. Few countries can claim to have achieved such high growth rates, or have created so many jobs… I wish to congratulate you on the many successes already achieved. As I stated during our meeting, the recent setback for the Mexican economy is bound to be transient, and we will be happy to be of assistance during the consolidation process” (author’s underlining). [7] Less than a year earlier, Alden W. Clausen still chaired the Bank of America, which was busy providing loan on loan to Mexico.

On 20 August 1982 Mexico, which had paid back considerable amounts over the first seven months of the year, stated that it could not pay any more. It decreed a six month moratorium (August 1982 to January 1983). It had only 180 million dollars in reserve and was expected to pay 300 million on 23 August. Already in early August Mexico had told the IMF that its currency reserve was down to 180 million dollars. At the end of August the IMF convened with the Federal Reserve, the US Treasury, the Bank for International Settlements (BIS) and the Bank of England. The director of the IMF, Jacques de Larosière, told the Mexican authorities that the IMF and the BIS were willing to grant currency loans in December 1982 on the twofold condition that the money be used to refund private banks and that Mexico implement drastic structural adjustment measures. Mexico accepted. It steeply devalued its national currency, considerably increased domestic interest rates, saved Mexican private banks from bankruptcy by nationalizing them and taking over their debts. In exchange, it seized the 6 billion dollars cash they had on hand. President José Lopez Portillo presented this measure to the Mexican people as though it were a nationalist move. He of course refrained from divulging that the 6 billion dollars would be used to pay back foreign bankers.

Who was really responsible for the Mexican debt crisis? Did Mexico start it?

Generally speaking, the reasons are obvious: a rise in interest rates decided in Washington, plummeting oil revenues and a huge debt are the structural causes. The first two are external factors and Mexico was helpless against them. The third one results from choices made by the Mexican leaders, whom the WB and private bankers encouraged to take on enormous loans.

Beyond these structural causes, which are fundamental, an analysis of how one thing led to another shows that private banks of the North started the crisis in that they significantly reduced the loans granted to Mexico in 1982. Aware that almost all available currency in the Mexican Treasury had been used to pay back the debt, they considered it was time to reduce their loans. In this way they brought one of the world’s largest indebted countries to its knees. Seeing that Mexico was facing the combined effects of a rise in interest rates – from which they profited - and a fall in its oil revenues, they chose to act first and move out. An aggravating circumstance was that foreign bankers had aided and abetted Mexican ruling circles (CEOs and leaders of the party-State called the Institutional Revolutionary Party) who were frantically transferring their capital abroad in order to invest it safely. It is estimated that in 1981-1982, no less than 29 billion dollars left Mexico as capital flight. [8] After precipitating the crisis private bankers then further benefited from it – and left it for others to mend matters. The evidence can be seen in the following tables.

Table 1. Foreign banks’ loans without any state guarantee and repayments to the banks (in million dollars)