Heavy borrowings by some Western Hemisphere countries to support development have reached the point where annual repayments of interest and amortization absorb a large share of foreign exchange earnings. . . Many of the countries are, in effect, having to make new loans to get the foreign exchange to pay interest and amortization on old loans, and at higher interest rates.
Nelson A. Rockefeller, 196929
In the 1970s, a changed world of global finance presented Latin American policy makers with unprecedented opportunities. Banks were bulging with petrodollars they received from OPEC members. Bankers felt lending this money to Latin America was financially sound since borrowers there paid higher interest than in the United States. From the point of view of the borrowers, the loans were good politics since they satisfied constituencies without incurring the political costs normally associated with redistributive policies. The IMF and the World Bank encouraged such borrowing. Both borrowers and lenders assumed interest rates would remain low, so that debts would not become overly burdensome. Finally, as Citicorp’s former chairman Walter Wriston optimistically noted, nations do not go bankrupt, so there was no reason to worry.30
As the events of 1968 made clear, Mexico urgently needed to address its social problems. With interest rates often negative after adjusting for inflation, President Echeverria (1970—1976) decided to borrow cheaply, grow the economy, and promote social welfare.31
During the latter part of his term, Echeverria became increasingly dependent on foreign loans, since private investment was declining. The old standby—exporting to finance development—no longer functioned since agriculture had been neglected and Mexico’s excessively protected industry could not produce the amount of exports needed to finance development. During the last three years of Echeverria’s term, the foreign debt increased at an annual rate of 44 percent. By the end of his term, Mexico was borrowing, not only to promote social welfare and finance development projects but to repay old loans and to compensate for capital flight, which totaled an estimated $4 billion in 1976.32
President Lopez Portillo (1976—1982) increasingly borrowed from commercial banks, with their enormous deposits of petrodollars, rather than from multilateral agencies such as the World Bank. By the end of Lopez Portillo’s term, six large U. S. banking corporations—Citicorp, Bank of America, Manufacturers Hanover, Chase Manhattan, Chemical Bank, and J. P. Morgan—together had loaned Mexico $11.3 billion. Borrowing greatly increased in volume and was increasingly used to finance oil development. By 1982, Mexico’s foreign debt was $90 billion, 450 percent above the level a decade earlier. Mexican policy makers felt that petroleum development would permit increased oil exports, which in turn could finance not only the righting of social wrongs but the repayment of loans.33
In August 1982, Mexico grabbed headlines around the world when it announced that it would suspend servicing its foreign debt since it did not have the dollars it was scheduled to pay. The underlying cause was again the inability of the classic import substitution model to generate exports needed to pay for imports. Rather than promoting exports, many of the billions borrowed during Lopez Portillo’s term were squandered in a non-competitive steel plant, a $6-billion nuclear power plant, new jets for the military, and payoffs to contractors and public officials. Mexico, which since the middle of the century had relied extensively on U. S. capital, found that the United States had begun to import capital to finance its fiscal and trade deficits. Finally, Mexico was increasingly finding itself caught up in the unforgiving world of high finance. Between 1977 and 1982, its foreign debt increased by 21.1 percent a year, while interest paid on the debt increased by 41.6 percent a year. Anyone familiar with geometric progressions or Ponzi schemes could realize such trends would not last long.34
The two events that finally ended this lending frenzy were a sharp decline in oil prices and a rise in interest rates as U. S. Federal Reserve Chairman Paul Volcker raised the prime interest rate to dampen inflation. In 1982, $9.182 billion in short-term Mexican debt came due. However, as the value of Mexico’s collateral—which largely consisted of oil—declined, banks refused to make new loans.35
Rather than following the 1920s model of allowing bankers to form a committee to negotiate with the Mexican government to see what they could salvage, the United States government took the lead in arranging a bailout package for Mexico. Since it shared a long common border with Mexico, the United States did not want to risk destabilizing its southern neighbor. Nor did it want to put its heavily exposed banks at risk. Neither the U. S. nor the Mexican governments wanted to set off generalized financial panic. Thus loan payment schedules were stretched out and new loans were written.36
Following Lopez Portillo’s bank nationalization, the debt situation worsened since the government absorbed $8 billion of foreign debt owed by the banks. This debt resulted from foreign borrowing by individual banks. In addition, the nationalization caused Mexicans to distrust banks and send their money out of the country for safekeeping. By the end of Lopez Portillo’s term, capital flight totaled at least $60 billion.37
Under De la Madrid (1982—1988), Mexico adopted a severe IMF-recommended austerity program that included increasing taxes and drastically cutting government services and subsidies. Rather than consuming, Mexico produced goods and exported them to raise money to service the debt. Deferring social programs also provided money for debt services. Mexicans’ standard of living plummeted since before the debt crisis Mexico had been consuming more than it produced and using loans to pay for this consumption. After the crisis began, Mexico consumed less than it produced and exported the surplus to pay for debt service.38
Between 1982 and 1988, payments on interest and principal exceeded new loans by $48.5 billion. By 1988, debt service absorbed 60 percent of the public-sector budget.39
The debt crisis weakened the PRI since the government could no longer afford traditional forms of patronage such as public works, housing, drainage, and water supplies. This decline in support for the PRI became clear to all after the 1988 presidential elections.
Throughout Latin America, nations were beset with debt problems similar to those that Mexico was facing. The result is now termed “the lost decade of the 1980s.” During that decade, Latin America transferred more than $200 billion to the developed world. As a result of massive debt payments, the entire area lacked imports to keep factories producing, to build new infrastructure, and to finance social programs. Debt repayment not only pitted rich versus poor but also banks versus manufacturers, since Latin America transferred money to bankers rather than buying U. S. manufactured goods. Former World Bank Executive Director Morris Miller commented on this capital flow: “Not since the conquistadores plundered Latin America has the world experienced a flow in the direction we see today.”40
At the beginning of the Salinas administration, the debt question cast a pall over Mexico. Even though interest and amortization paid during the De la Madrid administration totaled $60 billion, the foreign debt increased from $92 billion in 1982 to $100 billion in 1988. In 1988, interest payments on the debt totaled 17.7 percent of GDP. As analyst and later foreign minister Jorge G. Castaneda declared, “It isn’t possible to make the Mexican economy function when 12 or 13 billion dollars a year are still being sent to service the debt.”41
To head off a possible unilateral moratorium, to avoid the same violent protest against IMF-designed austerity measures that had racked Venezuela in February 1989, and to restart stalled economies, in March 1989 U. S. Treasury Secretary Nicolas Brady announced a plan to address the Third World debt problem. His proposal, known as the Brady Plan, called for partial forgiveness of debt if debtor nations adopted policies fostering foreign investment. To induce banks to accept “voluntary” reductions in the face value of their loans, the principal of the reduced debt was to be guaranteed by U. S. Treasury Bonds. As Harvard economist Jeffrey Sachs noted, the plan “implicitly recognizes that many debtor countries will be unable to repay their commercial bank debts in full, even if repayment is stretched over time.”42
The Brady Plan offered banks a choice of reducing principal, reducing interest, or loaning additional funds to Mexico. Few bankers saw Mexico as a place in which to invest, so they accepted a reduction in interest or principal, thus lowering Mexico’s indebtedness by $6.6 billion. This was not an act of altruism—more a taking stock of reality. As Forbes magazine noted: “Any scaling down of the Mexican debts is no act of sentimental generosity. It is based on a realization that the fates of the U. S. and Mexico are inextricably intermingled. A starving and seething Mexico would threaten U. S. security and would send millions of refugees fleeing across our borders.”43
Salinas adopted other measures to reduce the foreign debt burden. Receipts from the privatization of government-owned corporations were used to lower the debt. A decline in U. S. interest rates favored Salinas by reducing service costs on Mexico’s debt. Despite the Brady Plan, the use of privatization revenue (a one-shot event), and spending $137 billion on debt service between 1988 and 1995, Mexico’s public foreign debt remained largely unchanged. In 1988 Mexico’s debt stood at $100 billion, while in 1995 it totaled $101 billion. Reduced interests rates did lower debt service costs from 9.4 percent of GDP in 1990 to less than 2.9 percent in 1993, thus allowing an increase in public spending for social services.44
Revenue from privatizations, direct foreign investment, remittances from Mexicans working abroad, and oil sales allowed the Zedillo administration (1994—2000) to pay down the debt from $101 billion in 1995 to $85 billion in 2000. As a result of lower interest rates and economic growth, debt service declined from 40.1 percent of export earnings to 20.8 percent during these same years. Nonetheless, service costs—$13.3 billion in 1999 alone—of the still massive foreign debt formed a persisting drag on the economy.45
Under President Fox (2000—2006), Mexico’s foreign public debt steadily declined. By early 2006, it had reached $53 billion, thanks to repayment based on a favorable combination of low interest rates, high oil prices, direct foreign investment, and soaring remittances from Mexicans working in the United States. In August 2006, the government announced it was reducing the foreign debt by issuing $15.6 billion worth of peso-denominated bonds. The revenue from the bond sale reduced the public foreign debt to only $37.9 billion, or 4.9 percent of GDP. Shifting debt from foreign debt to domestic debt avoided potential problems with interest-rate increases in world markets.46
While Mexico has been largely successful in ridding itself of the burden of foreign public debt, it has traded that for another insidious burden—domestic debt. The domestic debt—pesos owed by the government to Mexicans—shot up during the De la Madrid administration since foreign loans to finance government deficits were no longer available. The current fortunes of some of Mexico’s richest people, including telephone magnate Carlos Slim, can be traced back to the exorbitant interest rates paid to holders of the domestic debt. The interest rate on this debt reached as much as 56 percent, causing domestic debt service to be more expensive than foreign debt
47
Service.
Under President Zedillo (1994—2000), the internal debt rose to almost $70 billion in dollar terms. During the Fox administration, the domestic debt reached the peso equivalent of $198.5 billion, or 25 percent of GDP. While the domestic debt draws much less notice than foreign debt, it is still a powerful force in the Mexican economy. In the first half of 2006, for example, the federal government spent almost 125 billion pesos on internal debt services, a sum that was 138.5 percent greater than what it spent on its twenty major social programs. Increasingly Mexican government finance resembled the early nineteenth century when the agiotistas held sway and impoverished the nation. In the nineteenth century, there were few attractive tax sources in a poorly monetized economy. By the twenty-first century, the problem was a lack of political will to raise taxes, not a lack of potential tax sources.48
World History
