Dragunov
09-29-2008, 01:08 PM
The Associated Press
Monday, September 29th 2008, 11:58 AM
MEXICO CITY — Mexico has a lesson for the U.S. about whopping bank bailouts: Buy bad debts in one swoop, boost oversight and force bank shareholders to pay a price for their rescue.
Mexico spent about US$137 billion to keep failing Mexican banks afloat in the mid-1990s. Along with a US$50 billion international loan package led by the U.S., the move is said to have saved its economy, ultimately drawing key investment from foreign banks that helped stabilize the system.
Yet questions linger about corruption, mismanagement and how the money might've been better spent.
As U.S. policy makers prepare a US$700 billion plan to purchase many of the risky mortgage debts that have triggered the current global financial crisis, some experts suggest they look south. In Mexico, they would see what happens when assets are resold with limited oversight and political interests intervene.
"The motive for both bailouts is the same: do or die," said Rafael Amiel, managing director for Latin America at Global Insight, a financial consultancy near Boston.
Both crises were so far-reaching, governments had little choice but to step in, he said.
In 1994, swelling debt and a growing trade deficit led to a surprise currency devaluation in Mexico.
The peso lost almost half its value, inflation soared and interest rates topped 100 percent — leading companies and families to default or withdraw savings. Banks suddenly stopped lending.
Previous financial crises had inspired Mexico to set up an emergency fund, known as Fobaproa, to keep banks afloat. The fund went to work in early 1995, buying up bad loans on the condition that banks would grant new credit to boost growth.
Over the next nine years, the government spent nearly 1.25 trillion pesos, about US$137 billion, to cleanse its financial system — an amount equal to 17 percent of GDP in 2004, according to a Mexican congressional audit of spending through that year.
Some debts were restructured with inflation-adjusted units known as UDIS, to prevent more of the steep interest rate hikes that had caused so many Mexicans to default.
But bailout programs were piecemeal and repeatedly extended, dragging on years longer than originally planned.
Critics fumed that the government was working to save private banks instead of small borrowers. And because it preserved shareholders' stakes, the bailout appeared to subsidize rich executives, many of whom had made bad loans.
Protesters dressed up as financiers and spattered themselves with fake blood to illustrate the credit-crunch carnage that the average Mexican felt.
Many said the government was "privatizing profits but socializing losses," a phrase echoed by critics of today's U.S. bailout plan.
"Fobaproa became synonymous with the devil. Public opinion always condemned it and stigmatized it as a bankers' bailout," done with little oversight or democratic debate, columnist Marco A. Mares wrote in Mexico City's La Cronica newspaper this week.
In its seventh decade of one-party rule at the time, the government had essentially acted alone in the bailout and financed Fobaproa without permission from Congress, by selling treasury bonds to banks in exchange for their overdue loans.
Yet when it came time to unload the assets that Fobaproa had acquired, the government sought congressional approval to convert them into public debt, asking taxpayers to cover the cost.
The opposition Democratic Revolution Party balked, lampooning the fund as an "assault against the economy," and accusing top officials of fraud and mismanagement.
A congressional audit investigated officials, businessmen and bankers who allegedly resold fund assets to friends at bargain rates — though charges were never filed.
In the end, a deal was struck in 1998, restructuring Mexico's entire financial system, boosting lending oversight and guaranteeing deposits.
Fobaproa was replaced by a new institute known as IPAB, which began operating in 1999.
With newly clean balance sheets, many Mexican banks were later bought by large foreign financial institutions, including Citigroup, HSBC and Spain's Santander — giving critics the impression that Mexico's government had subsidized a foreign takeover of its banking system.
"It's a long, complex road," said Carlos Nunez, head of equity consulting at Grupo Financiero Monex, a Mexico City brokerage.
But while painful and expensive, the bailout was necessary to avoid inevitably worse consequences — like those seen when Argentina declined to shore up teetering banks in 2001, prompting a run and then a freeze on deposits, and ultimately, the world's largest-ever government default, he said.
Fobaproa is still politically controversial in Mexico, and newspapers this week slammed the U.S. bailout as "Fobaproa a la Gringa," linking the U.S. plan to its muddy name.
But Mexico's lesson should make U.S. policy makers appreciate the tough debate that has honed their plan, analysts said.
That public discussion didn't happen south of the border — and while its flawed bailout ultimately saved banks, Mexico's ruling party soon after lost power.
"It's an encouraging sign that the U.S. political system is grappling very quickly with a very difficult issue," said Joydeep Mukherji, a sovereign ratings director who covers Mexico at Standard and Poor's in New York.
"Even if in retrospect there are problems with the plan, at least you can say, 'Look we have a political process and it worked.' It's democracy in action."
http://www.nydailynews.com/latino/2008/09/29/2008-09-29_lessons_from_a_mexican_bailout_oversight-2.html
Monday, September 29th 2008, 11:58 AM
MEXICO CITY — Mexico has a lesson for the U.S. about whopping bank bailouts: Buy bad debts in one swoop, boost oversight and force bank shareholders to pay a price for their rescue.
Mexico spent about US$137 billion to keep failing Mexican banks afloat in the mid-1990s. Along with a US$50 billion international loan package led by the U.S., the move is said to have saved its economy, ultimately drawing key investment from foreign banks that helped stabilize the system.
Yet questions linger about corruption, mismanagement and how the money might've been better spent.
As U.S. policy makers prepare a US$700 billion plan to purchase many of the risky mortgage debts that have triggered the current global financial crisis, some experts suggest they look south. In Mexico, they would see what happens when assets are resold with limited oversight and political interests intervene.
"The motive for both bailouts is the same: do or die," said Rafael Amiel, managing director for Latin America at Global Insight, a financial consultancy near Boston.
Both crises were so far-reaching, governments had little choice but to step in, he said.
In 1994, swelling debt and a growing trade deficit led to a surprise currency devaluation in Mexico.
The peso lost almost half its value, inflation soared and interest rates topped 100 percent — leading companies and families to default or withdraw savings. Banks suddenly stopped lending.
Previous financial crises had inspired Mexico to set up an emergency fund, known as Fobaproa, to keep banks afloat. The fund went to work in early 1995, buying up bad loans on the condition that banks would grant new credit to boost growth.
Over the next nine years, the government spent nearly 1.25 trillion pesos, about US$137 billion, to cleanse its financial system — an amount equal to 17 percent of GDP in 2004, according to a Mexican congressional audit of spending through that year.
Some debts were restructured with inflation-adjusted units known as UDIS, to prevent more of the steep interest rate hikes that had caused so many Mexicans to default.
But bailout programs were piecemeal and repeatedly extended, dragging on years longer than originally planned.
Critics fumed that the government was working to save private banks instead of small borrowers. And because it preserved shareholders' stakes, the bailout appeared to subsidize rich executives, many of whom had made bad loans.
Protesters dressed up as financiers and spattered themselves with fake blood to illustrate the credit-crunch carnage that the average Mexican felt.
Many said the government was "privatizing profits but socializing losses," a phrase echoed by critics of today's U.S. bailout plan.
"Fobaproa became synonymous with the devil. Public opinion always condemned it and stigmatized it as a bankers' bailout," done with little oversight or democratic debate, columnist Marco A. Mares wrote in Mexico City's La Cronica newspaper this week.
In its seventh decade of one-party rule at the time, the government had essentially acted alone in the bailout and financed Fobaproa without permission from Congress, by selling treasury bonds to banks in exchange for their overdue loans.
Yet when it came time to unload the assets that Fobaproa had acquired, the government sought congressional approval to convert them into public debt, asking taxpayers to cover the cost.
The opposition Democratic Revolution Party balked, lampooning the fund as an "assault against the economy," and accusing top officials of fraud and mismanagement.
A congressional audit investigated officials, businessmen and bankers who allegedly resold fund assets to friends at bargain rates — though charges were never filed.
In the end, a deal was struck in 1998, restructuring Mexico's entire financial system, boosting lending oversight and guaranteeing deposits.
Fobaproa was replaced by a new institute known as IPAB, which began operating in 1999.
With newly clean balance sheets, many Mexican banks were later bought by large foreign financial institutions, including Citigroup, HSBC and Spain's Santander — giving critics the impression that Mexico's government had subsidized a foreign takeover of its banking system.
"It's a long, complex road," said Carlos Nunez, head of equity consulting at Grupo Financiero Monex, a Mexico City brokerage.
But while painful and expensive, the bailout was necessary to avoid inevitably worse consequences — like those seen when Argentina declined to shore up teetering banks in 2001, prompting a run and then a freeze on deposits, and ultimately, the world's largest-ever government default, he said.
Fobaproa is still politically controversial in Mexico, and newspapers this week slammed the U.S. bailout as "Fobaproa a la Gringa," linking the U.S. plan to its muddy name.
But Mexico's lesson should make U.S. policy makers appreciate the tough debate that has honed their plan, analysts said.
That public discussion didn't happen south of the border — and while its flawed bailout ultimately saved banks, Mexico's ruling party soon after lost power.
"It's an encouraging sign that the U.S. political system is grappling very quickly with a very difficult issue," said Joydeep Mukherji, a sovereign ratings director who covers Mexico at Standard and Poor's in New York.
"Even if in retrospect there are problems with the plan, at least you can say, 'Look we have a political process and it worked.' It's democracy in action."
http://www.nydailynews.com/latino/2008/09/29/2008-09-29_lessons_from_a_mexican_bailout_oversight-2.html