Financialization in Mexico - Dr. Gregorio Vidal

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266 JOURNAL OF POST KEYNESIAN ECONOMICS firms) to creditors. The upshot of this cut lines of refinancing, raised interest rates to excessive levels, and left the International Monetary Fund (IMF) and the World Bank to supervise an orderly exit (Martínez Hernández, 1989). Therefore, a first stage of the transition toward a regime of financialized accumulation had culminated under the intense push of the first of three financial crises, generating a massive transformation and distribution of profits, in addition to the loss of salaries, employment and the deterioration of social welfare institutions. Furthermore, many of the stronger economic groups and unions lost political power or had it transferred to other actors (Alvarez, 1997). Toward the end of the 1980s, and driven by the pressure of those economic groups that benefited from the financial bailout and that had accumulated large amounts of public debt, the government launched a broad process of privatization of state-owned companies and banks (Vidal, 2009b). The flotation of stocks and bonds that resulted from these operations was enormously profitable for local and foreign investment banks. Also important for these actors was the securitization of much of the foreign external debt under the Brady Plan, which acted as a mechanism that somewhat eased the Mexican government’s debt burden, although the lowering of international interest rates served as a more decisive factor in this sense. Accompanying these factors, and in the context of the deregulation in both the Mexican and U.S. markets, portfolio investment in Mexico reaped significant commissions and gains. Between 1990 and 1993, total investment inflows reached $52.8 billion, transforming Mexico into the largest destination of foreign investment among emerging markets. Of this sum, over 70 percent was portfolio investment (Edwards and Naim, 1998). During this short-lived boom, ratings agencies gained an important role as they moved past evaluating public debt and into examining the finances of the largest privately held domestic firms, many immersed in processes of internationalization. During these years, the government also undertook a broad and profound financial reform, which in addition to privatizing much of the country’s banking sector, eliminated the mechanism of mandatory deposits, deregulated capital inflows into domestic markets (including the purchase of public debt), legislated the formation of financial groups (universal banks) with the participation of foreign banks, granted independence to the central bank, and reduced the role of the development banks, ceasing their functions as deposit-taking institutions for the segment that performed this function. In addition, these same years saw the
FINANCIALIzATION IN MEXICO: TRAJECTORY AND LIMITS 267 negotiation of the North American Free Trade Agreement (NAFTA), which served as much to open the economy to foreign investment as it did to open trade. Besides offering guarantees for the property rights of investors, NAFTA almost completely blocks the establishment of controls over the remittance of earnings, dividends, and other transfers of FDI or portfolio investments (Girón et al., 1995). In a few short years, financial reform, the privatization of much of the banking system, and the credit and stock market bubble led to another financial and economic crisis. This time the accompanying international credit bubble can be placed at the feet of institutional investors. The creation of the soon-to-be-dafaulted-on tesobonos, which were basically government bonds with a built-in hedge against currency devaluation, was in direct response to the needs of institutional investors (Correa, 1998). The former director of the IMF, Michel Camdessus, claimed that the so-called tequila crisis was the first crisis of globalization. While his syntax is misleading, the Mexican crisis of 1994–95 was indeed the first crisis of an institutional investor-led bubble, with subsequent crises in East Asia, Russia, and Brazil (among others) representing other links along the chain of institutional investor-led crises (Marshall, 2010). Once again, structural adjustment policies were implemented, but unlike 1982, when capital controls and bank nationalization were imposed, the financial markets were kept open in 1995 with peso-denominated interest rates quickly rising to annual rates of above 100 percent. Banks were generously capitalized with public funds, and toxic assets were exchanged for high-yield and low-risk government securities. The losses for workers were enormous in terms of unemployment, declines in real salaries, and cuts in social spending. As will other financial crises, millions fell into the ranks of poverty within months (Guillén Romo, 2007; Labra, 1997). A few years after the onset of the crisis, the process of acquisitions of domestic banks by global conglomerates began in earnest, with Spanish banks Santander and BBVA, Canadian Scotiabank, Britain’s HSBC, and Citigroup all assuming systemic positions in the local market. These banks currently dominate the domestic financial market in all of its segments and control the system of payments. These banks reached these positions almost exclusively through acquisitions, which was the global internationalization strategy during the global competition of the 1990s. Subsequently, social security was privatized, and workers’ contributions were transferred to the administration of these financial entities, while the payment of retirement funds was transferred to the government
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Financialization in Mexico - Dr. Gregorio Vidal

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