This article was originally published in Maclean's Magazine on January 16, 1995
Mexico's Peso Crisis
He has been dubbed the Accidental President - a shy, uncharismatic technocrat who won the highest office in Mexico almost by default after the assassination of the chosen candidate. And ever since he was sworn in on Dec. 1, the shaky six-week-old regime of Ernesto Zedillo Ponce de Léon has found itself on a decidedly star-crossed course, reeling from one disaster to the next. Greeted at the presidential palace, Los Pinos, by a missive from Subcommandante Marcos, leader of a year-old peasant rebellion, that read, "Welcome to the nightmare," Zedillo promptly got the message. As the rebels retook key towns and blocked highways in the southern province of Chiapas, the renewed unrest shook the Mexican stock market, which in turn set off the worst currency crisis to hit the country in 12 years. With an abrupt devaluation sending the peso plummeting 35 per cent over a two-week period - and wiping out an estimated $10 billion in foreign investment - even Zedillo's announcement of an $18-billion international bailout package last week failed to calm either the tense populace or the panicked global financial markets.
It was only when he dispatched his new finance secretary, Stanford-educated economist Guillermo Ortiz Martinez, to New York City at week's end to reassure U.S. and Canadian bankers that both the peso and Mexican securities markets began to stabilize. In the packed ballroom of the Pierre Hotel, Ortiz kept repeating his message that Mexico's current cash-flow problems are a far cry from 1982 when Carlos Salinas de Gortari shocked a Toronto meeting of the International Monetary Fund by announcing that the country could not meet the payments on its staggering $80-billion debt-load. "The object of the meeting was to basically reassure the financial and investment community," said Paul Wilson, senior public affairs adviser for the Royal Bank, which sent a representative to New York, "and in that respect it was an unqualified success."
This week, Mexican Foreign Minister José Angel Gurria - who was involved in renegotiating Mexico's debt in the 1980s - is expected in Toronto and Ottawa to repeat that reassurance. But the entire devaluation crisis appears to have brought home one stark political reality to Zedillo: while bankers and economists were unanimous in deeming that devaluation was necessary, they were furious at not being forewarned. Said Roderic Camp, a professor of Latin American studies from Tulane University in Louisiana: "The crisis is basically a question of perception at this point. Zedillo needs to understand that image and consequence are more important than substance."
But if the money markets were calmed by Zedillo's belated public relations exercise, not everyone else was. Many Canadians were discomfited to learn that Ottawa's $1.5-billion share of the global line of credit extended to Mexico had been triggered not by any philanthropic impulse but by a virtually unknown obligation signed with the North American Free Trade Agreement. Under the terms of that agreement, all three governments had committed to come to any of their partners' rescue in a currency crisis. That pledge had only obliged the Bank of Canada to come up with a $1-billion line of credit. But the fact that it offered an additional $500 million in funding signalled to some, like NAFTA opponent Maude Barlow, president of the Council of Canadians, that Ottawa judged the crisis to be a critical one. "We stepped over what we had to do," she said. "I would argue that shows the seriousness of the instability."
Mexico City may never call upon that $1.5 billion - part of a package that included $9 billion from Washington and another $8 billion from Europe's Bank of International Settlement and private banks. Indeed, one Bank of Canada official, requesting anonymity, told Maclean's that the credit facility is "a straight currency swap" that carries "virtually no risk." If the value of the peso falls, costing Mexico more to repay the Canadian funds, he explained, Mexico is obliged to make up the difference or forfeit the posted collateral. Still, Barlow pointed out, should Zedillo need to cash in on the offer, that could have potential repercussions here. "If they were not able to pay their debt," she warned, "the Canadian taxpayer would be responsible."
To many, the possibility seems all the more astonishing at a time when the government is already warning of draconian cuts to come, especially to social programs, in the February budget. For his part, Alberta MP Bob Mills, Reform foreign affairs critic, said he was prepared to take the Bank of Canada at its word, but many of his constituents had expressed outrage at the move. "People have been asking, 'What are we doing giving money to Mexico?' " he noted. Added Barlow: "We're told part of our debt cannot be assumed by the Bank of Canada, as it was in the past. If they can do it for Mexico, why can't they do it here?"
Coming just weeks after the mariachi-spiced hoopla of the Summit of the Americas in Miami, the crisis has also called into question the government's rush to embrace NAFTA's further expansion south to Latin America. And for Prime Minister Jean Chrétien, who heads off on a 12-day tour of six Caribbean and Latin American nations later this month, those questions could not have come at a more awkward time. "It's not a case of run-for-the-hills, Mexico's going to collapse," said Richard Whiting, portfolio manager of the Americas Fund of Trimark Investment Management Inc. in Toronto. "But what it has pointed out to people is that there is risk in the region. It isn't as stable as even Asia is."
For the Toronto-based brewer John Labatt Ltd., which paid $720 million for a 22-per-cent stake in Mexico's second-largest brewery, Femsa Cerveza SA, last July, the degree of Mexico's devaluation crisis hit particularly hard. "We anticipated there would be some devaluation in the near term," said Lorne Stephenson, Labatt's vice-president of corporate affairs. "But we had really not contemplated it would dip as drastically as it did." With such a large piece of Femsa, that means "obviously the investment doesn't have the same value as it did," he said. "Those operational earnings, converted into Canadian dollars, will be less." Still, Labatt, like many other Canadian corporate investors, insists that it remains optimistic about Mexico's long-term potential for economic prosperity.
The most urgent questions hover over the short term - and how the Mexican government deals with $10 billion in high-interest, short-term bonds, known as tesobonos, which fall due at the end of March. If Zedillo and Ortiz cannot persuade international investors to roll them over, the country could very well confront the next in a predicted series of credit crunches.
The resolution of that problem will also rest on how well Mexico succeeds in repairing its tattered international image - an image that was carefully cultivated to win approval of the controversial NAFTA pact in the U.S. Congress through a lavish $20-million public relations campaign. Paradoxically, in fact, some critics of the trade deal are now blaming the very success of that effort for the country's current financial crisis. In an effort to assure such critics of NAFTA as Texas billionaire and 1992 presidential candidate Ross Perot - who warned of "the giant sucking sound" as American plants fled southward to profit from cheaper Mexican labor - former president Salinas had kept the peso valued artificially high, and that masked many of the country's underlying structural problems. Meanwhile, he kept the economy booming, not with increased exports and production, but with more borrowing and with a wave of privatizing state-owned enterprises. Said NAFTA critic Lawrence Birns of Washington's Council on Hemispheric Affairs: "It was like a giant Ponzi scheme."
Even after NAFTA's passage, a series of crises conspired to prevent Salinas from tackling devaluation: first, the 1994 peasant revolt in Chiapas, which began to shake investor confidence, then the March assassination of his designated presidential heir, Luis Donaldo Colosio, in last August's presidential election. Traditionally, outgoing Mexican presidents have paved the way for their successors from the Institutional Revolution Party, which has been in power since 1929, by taking on a devaluation of the peso as their parting gift in office. But Salinas failed to do so, because, some charge, of his ambitions to become the first head of the new World Trade Organization.
In fact, the opposition Party of the Democratic Revolution (PRD) claims that it is considering filing criminal charges against Salinas - as well as former finance secretary Pedro Aspe Armella and former trade minister Jaime Serra Puche - for acting in his own interest rather than for the benefit of the country. But some opposition critics also blame Washington, which reaped a $28-billion trade surplus with Mexico last year thanks to the overvalued peso, which kept U.S. imports cheap. "Salinas is not only an egotist," charged Jorge Calderon Salazar, a former legislator and economic adviser to the PRD. "I think the United States also pressured him to keep the peso stable to enjoy a huge trade surplus."
Whatever the reason, his inaction saddled Zedillo with the task before he had time to consolidate his hold on power - and with the Chiapas rebels already threatening the government's stability. But what most riled international investors was that this time the abrupt devaluation of the peso came only 10 days after they had been assured no such move was imminent by Serra Puche, who had been the chief point man on the NAFTA negotiations. Their reaction was in some measure a punishment for that sense of betrayal. Still, the political sacrifice of the respected Serra Puche proved no more reassuring.
Nor did Zedillo's initial efforts to explain his move to international investors. Calling that first meeting in New York two weeks ago, the Mexicans failed to invite any Canadian banks. Even this time around, the government inexplicably left off its invitation list the Bank of Nova Scotia, the only Canadian chartered bank with a direct investment in a Mexican financial institution - a five-per-cent share of Grupo Financiero Inverlat SA.
For now, to bring in more foreign currency, Zedillo has hastened another wave of privatizations - including the country's ports, railroads and telecommunications sectors - at fire-sale prices. But as Tulane University's Camp points out: "There aren't many goodies left." And the pact Zedillo wrested from Mexican unions to accept seven-per-cent wage increases - a negotiation that dragged on for 22 hours and forced him to delay a planned televised speech to the nation - may bring about more social unrest if, as predicted, Mexico's inflation reaches 19 per cent by the end of this year. Said Camp: "How much longer will labor be willing to sacrifice?"
Ironically, the devaluation will make Mexican exports - and labor - more attractive. And that could prompt the very prospects that Washington and Ottawa most fear: Perot's "giant sucking sound" of jobs heading southward across the Rio Grande. But few in any of the NAFTA capitals wanted to think about one of the clearest consequences of the crisis: Mexico had essentially lost control of its economic policies to the dictates of the money markets. As Reform's Bob Mills pointed out: "It's a warning to us. The same thing could happen to us."
Maclean's January 16, 1995