Rescuing the rich in Mexico

September 16, 1998
Issue 

By Peter Gellert

MEXICO CITY — While the Asian and Russian disasters have contributed to Mexico's current economic crisis, domestic issues also play a central role. The inability of the Mexican government and the Congress to resolve the controversy surrounding the bank bail-out program continues to undermine confidence in the Mexican economy.

The bail-out program, conducted by the Bank Savings Protection Fund (FOBAPROA), was launched during the 1995 economic crisis and involved the government buying up banks' overdue loan portfolios, to the tune of US$65 billion, equivalent to 16% of Mexico's annual gross domestic product.

Now the Zedilló government wants the Mexican Congress to authorise the conversion of FOBAPROA liabilities into public debt. That would raise the debt from 26 to 42% of the annual GDP.

The government's argument is that the alternative is the collapse of the financial system, with catastrophic consequences for all.

The issue has pitted the left-of-centre Party of the Democratic Revolution (PRD) against the government of the Institutional Revolutionary Party (PRI).

The PRD charges that bankers provided loans to each other and to close business associates, made massive donations to the PRI's election campaigns, and then passed on uncollectible and sometimes fraudulent loans to FOBAPROA. In any case, it is clear that some of the country's most rich and powerful defaulted on loans that the government now proposes to absorb.

The question raised by the PRD, and also by El Barzon, the debtors' movement, is whether the government should bail out those who can most afford it, at the expense of those who can least afford it.

Indeed, half of FOBAPROA's debts, more than 600 multi-million-dollar loans, correspond to credits that banks granted to rich investors.

In July, PRD president Andres Manuel Lopez Obrador released a list of 304 bankers, businesspeople and investors who allegedly benefitted from FOBAPROA to the tune of $11 billion.

Four of those who were aided by FOBAPROA are on Forbes magazine's list of the richest men in the world, two were members of the financial committee of the PRI in 1998, seven attended the famous 1993 banquet where the wealthiest men in Mexico each pledged $25 million to the PRI, and several are bankers who lent themselves millions — then defaulted on their loans.

What was initially a major banking and financial scandal rapidly escalated into a political scandal. Every day for two months, news has appeared about how PRI campaigns have been funded by crooked and in some cases fugitive bankers through defaulted loans taken over by government bail-out agencies. The spotlight has also fallen on Roberto Madrazo, the governor of Tabasco, a PRI hardliner whose campaign spending was 60 times the legal limit, financed by huge contributions from bankers whose massive debts were assumed by FOBAPROA.

A general suspicion has arisen in society that there is a network of complicities between banking and financial corruption and top political circles.

The PRD, backed by the conservative National Action Party, which is rapidly trying to distance itself from a government increasingly in disgrace over this issue, is demanding a full and impartial investigation. The PRD also announced a nationwide referendum to ask the Mexican people whether the banker's loans should be converted into public debt.

The reaction of the authorities has been swift and strong, accusing the PRD of being irresponsible and using the issue for electoral gain.

Officials argued that information on credit is confidential, covered by bank secrecy rules. Furthermore, finance minister Jose Angel Gurria argues that any delay in approving the conversion of FOBAPROA's accounts to public debt would undermine investor confidence in Mexico.

The government authorities have accused the PRD of provoking capital flight, a rise in interest rates and leading the country into an economic crisis. While the scare campaign has received the backing of the organised business interests, it doesn't appear to have too many other takers.

The government clearly wanted an agreement with the PRD and other parties on how to deal with the FOBAPROA liabilities. The PRD, El Barzon and other debtors' organisations, and social movements are increasingly unwilling to play that game. They believe the best way forward is to take the issue directly to the people.

Even within the ruling party, many legislators are reluctant to pass debt on to taxpayers over a 30-year period. This would cut directly into federal social spending, which has already been slashed by 40% since 1994.

There has been the suggestion of a compromise formula by the PRI to reduce the overall amount to be converted into public debt, accompanied by a review of FOBAPROA operations. At the same time, the ruling party is furiously rejecting calls to investigate its 1994 campaign finances.

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