Don Quijones: Mexico on the Verge of a New Tequila Crisis?

By Don Quijones, a freelance writer and translator based in Barcelona, Spain, and editor at Wolf Street, where this article was originally published

As the old adage goes, things have an annoying habit of occurring in threes. It’s particularly true in the case of crises, which tend to fuel each other in a potentially lethal feedback loop. And Mexico is already experiencing blowback from two separate but strongly interlinked crises.

One is primarily social in nature, resulting from the rise of public rage and resistance following the disappearance of 43 students from the narco-controlled town of Iguala. The other is essentially political: support for the current government is in freefall after a string of funding scandals involving the country’s President, Enrique Peña Nieto.

Public anger is blossoming as the full scale of collusion between the local government and organised crime finally comes to light. As John Gibler, an author and independent journalist told Democracy Now, it’s no longer possible to talk about corruption in Mexico; what we essentially have are two sectors in an industry that have fully merged: the police and drug traffickers. Stuck in the middle are millions of law-abiding Mexicans who just want to go about their lives without the constant fear of disaster hanging over their heads.

But what if there were to emerge a third crisis – an economic one? On the surface Mexico’s economy is in a stable enough condition. Growth continues to splutter at around 2% this year (far less than the 3.5% originally forecast by the IMF). The country continues to serve as a vital global manufacturing hub, in particular for its largest trading partner, the U.S. And the historic bugbear of inflation seems to be under control, hovering around 3%.

However, there are worrying signs that Mexico’s travails could soon be made a whole lot worse by deteriorating economic conditions, both on the domestic and international front. The first reason has to do with oil.

1. Troubles at the Pump. Like many oil producing nations, Mexico is struggling to come to terms with the plunging oil prices. On Monday, the price of Mexico’s mix reached $63.72 per barrel on the Brent Index, its lowest point since July 2009. Mexico cannot survive for long on this price, especially considering that oil revenues account for roughly one-third of government finances.

The situation has put a hefty spanner in the government’s reforms to liberalize and privatize the state oil giant, Pemex. The idea might have seemed a smart one two years ago when the legislation process began and oil prices were sitting pretty at around $120 per barrel; now, with prices over 40% lower and threatening to drop further, the government’s timing could not have been worse.

The lower prices could well be here to stay. In such a scenario, Mexico could have serious difficulties selling off its oil assets, at least for a semi-reasonable price, piling further pressure on its already strained public finances. All the while…

2. The Debt Keeps Rising. External and internal public and private debts have more then doubled since 2000, from roughly $250 billion to $550 billion today. In the last two years alone, since Peña Nieto took over, Mexico’s public debt has increased by over 21%, to reach close to $400 billion dollars (38% of GDP). Granted, this pales in comparison with the staggering levels of debt registered by its Northern neighbor and most European countries.

However, as Raúl Zarate writes in El Sol de Puebla, this massive increase in debt has not generated respectable levels of growth at any stage during the last 14 years. After 32 years of PRI and PAN-sponsored neoliberal policies, the economy continues to labor like a “burrito” (little donkey), gingerly taking “four steps forward,” followed by “four steps backward.”

While 75% of this debt is internally financed, as the government is fond of repeating, the reality is somewhat more complex: The domestic banks that issue loans to the public authorities are in fact by and large subsidiaries of foreign banks, while the loans in local currency are pegged to a much stronger currency (the U.S. dollar). This means that if the peso is devalued or the value of the dollar increases – as is happening right now – the amount to be reimbursed increases considerably. It also means that the major foreign banks – primarily Santander, Citi, HSBC and BBVA – are making a tidy packet from the growth in internal public debt.

Then there’s Mexico’s biggest financial risk…

3) Hot Money and Cold Feet. Arguably the greatest threat to Mexico’s economy is a dramatic reversal in foreign investment flows. Since the U.S. Federal Reserve alighted on its madcap scheme to flood the global economy with cheap, easy-come-easy-go dollars, high-yield seeking “investments” have poured into emerging markets. Much of it ended up in Mexico, one of comparatively few Latin American economies to have completely liberalized its financial sector.

If the Fed were to begin raising interest rates, it would significantly tamper investor appetite for risky, high-yield emerging market assets. As the IMF warned in its so-called Article IV consultation with Mexican authorities, “A surge in financial market volatility, triggered for example by a disorderly normalization of U.S. monetary policy, could lead to a reversal of capital flows and an increase in risk premia.”

If that were to happen, the consequences could be dire, not only for Mexico but for the broader Latin American economy. The last time Mexico suffered a similar fate was during the 1994 Tequila Crisis when billions of fickle dollars fled the country to chase rising U.S. interest rates. The parallels with today are disconcerting. Then, as now, the Fed caught the world unawares with a sudden tightening of its monetary policy. Then, as now, Mexico was gripped by a sudden wave of political instability. A short-lived Zapatista insurrection flared in the Southern region of Chiapas. A few months later, two prominent political figures, including then-President Carlos Salinas’ anointed successor, Luis Donaldo Colosio, were assassinated.

4) The Vultures are Circling

Even more ominous is the enduring involvement of the IMF in Mexico’s economic affairs. In 1994-5 it played a frontline role in the bailout of Mexico’s financial sector. According to Larry Kudlow, the economics editor of the conservative National Review magazine, the beneficiaries were neither the Mexican peso nor the Mexican economy:

It is a bailout of U.S. banks, brokerage firms, pension funds and insurance companies who own short-term Mexican debt, including roughly $16 billion of dollar-denominated tesobonos and about $2.5 billion of peso-denominated Treasury bills (cetes).

As I wrote in “The Tequila Crisis: The Prelude to Europe’s Economic Storm,” the money lent by the IMF, US Treasury (without Congress’ approval), and the Bank of International Settlement was speedily channelled via Mexico’s treasury and struggling banks to the coffers of some of the world’s largest private financial institutions. The money barely touched Mexican soil, yet much of the debt remains to this day.

Now, 20 years on, the Fund of Funds is back in the driving seat. In June this year, it kindly renewed a $70 billion “flexible credit line” for the Mexican government. Merely meant as a “precautionary measure,” the FCL purportedly has no strings (i.e. no structural adjustment conditionalities) attached and is only reserved for countries that have shown themselves capable of consistently applying “solid economic policies” – in other words, following the IMF’s every order, something the Mexican government has done with aplomb.

The last thing Mexico needs is the attentions of the world’s biggest financial shakedown artist – an institution that, in the words of former IMF economist Davison L Budhoo, “make(s) or break(s) human life every day of every year as probably no other force on earth has ever done in the past or will ever do again.”

Mexico – or at least its middle class – is still paying off the debt from the first Tequila Crisis. The question is: could there now be a second one? Given the connections and affection I have for the country, I hope not. Things may turn around, public rage may die down, the narcos may lie low, and global macroeconomic economic conditions may pick up. But hope rarely is a good long-term strategy.

The Mexican government blames the nationwide protests on groups seeking to “destabilize the country” and undermine the “reform agenda.” But in this militarized and corrupt society, the risk of escalation of violence is immense. Read…  Mexico on the Brink – But of What?

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  1. Ishmael

    One thought I have any more is the ultimate goal of the people in our government is to bring the economic situation down to the level of Mexico and then they can merge the two. Of course the standard of living of the average person in the US will be in the toilet but the people in charge will rule over a much bigger plantation. Why else do they not safe guard the border and other commenters here have made comments with glee that we are no longer a country or have national borders.

    From Mexico down to Argentina you have had mass poverty with a few very wealthy families calling the shots. That appears to be the future the US is heading for. Oh, and all of this has a wrapper of socialism wrapped around it. That is one of the reasons these countries have large external debts and continual currency devaluation problems.

  2. voxhumana

    Cielito Feo

    I lived and loved in Mexico as a college student in 1976. My dad has his Masters degree in Spanish/Latin American Lit from the Universidad de Mexico and would frequently take groups of students there for immersion education. I’ll never forget the trek up the mountain to visit the mile high shrine outside of Tepotzlan, even though my friend and I were stimulating with some fine sin semilla to get there ( we figured we wouldn’t notice if we fell off the cliff). Yeah, I love Mexico and have even considered moving there. But I’ve so far balked, knowing that as a gringo I have a target on my back. Their northern neighbor and its Intl. crime syndicate (IMF) inspire much justifiable animosity and the govt there has played doormat to the two headed beast for most of its history. Still, I “remember” the Alamo…

    Great essay!

  3. Mattski

    The drug crisis, like the bank crisis, is also fueled by US interests (indeed, many of them also in banks). It too merely depends on Mexico for labor, and to carry the risks.

    1. Mattski

      I think that we have a higher rate of per capita gun violence than Mexico, so it might be a matter of how you look at this. But then, few smart readers here have any doubt that WE’RE in crisis. . .

      1. Ishmael

        I tend to doubt the accuracy of this statement.

        Most forms of violence in the United States has been in decline for several years with one of the main reasons being the aging of the population.

      2. Ishmael

        Okay, I just checked. The chance of dying by gun violence is three times greater in Mexico per capita than the United States. Now, if you consider where most of this gun violence takes place in the United States you will find that it is by people (on people generally) from south of the border. In LA the LA Times said that 90% of the homicides in Los Angeles was by illegal aliens. Just a couple of blocks from where I live there was a triple homicide of Hispanic males getting off of work one evening. They said it was a gang hit. The chief of police said this was one of the safest neighborhoods in LA.

          1. Ishmael

            Nothing in either of those articles surprising. Most gun violence in the US is minority on minority usually by the same minority group.

            By the way in the second article. Illinois ranks as one of the highest homicide rates (really this is Chicago) and has some of the toughest gun laws in the US.

        1. Mattski

          Actually, the US has 10.30 death per 100,000 people to Mexico’s 11.17, according to wikipedia, which kind of makes my point: not that much difference, but we are glad to get hysterical about deaths and killing elsewhere. Obviously, the Mexican killings are horrific; so are ours. The difference: here you and I can do something about it (like stop consuming drugs). The fact that people kill their neighbors is unremarkable to me, but maybe I am missing something. White people kill white people, too.

  4. susan the other

    If we (neoliberals, especially in the US) have colluded (in order to save our totally absurd system) to bring oil prices back down to what might become a market price in another decade (if we are lucky) – 60$bl – Mexico, which is already destitute except for the kleptos, will have a social deprivation that will become dangerously unstable. The Pemex revenue was socialized for a good reason in the early 20th c. and used to fund social programs like education and welfare and health and all the stuff that unconscionable neoliberals think are pointless. Like Hollande begrudging any help for the “toothless”. But we will all soon learn what the point of social economics is. If Venezuela goes down it is going to be interesting. The saving of Venezuela will have to be a modern-day lesson in contrition. One thing we should do immediately to forestall a continued drug war bloodbath in Mexico is legalize drugs. Take drug profits away from the murderous criminals now in charge. Let them be the toothless. And their goddam banks.

    1. jimmy elliot

      The article resonates for me – and I’m all for legalizing enough drugs to remove most of the profit. Legalizing Marijuana, Cocaine, and Heroine should do it – The rest of the drugs would get to be pretty irrelevant. Of course legalization would trade one set of problems for another, but I think on balance it would result in a better outcome. Considering what might be the ultimate Mexican Standoff between the Narco’s and the Rentier class – It seems that there has to be some “understanding” between the 2 groups and turf arrangements. I’m imagining it’s like Mafia Groups used to work things out – It may be the case that the Narco’s essentially own the politicians. US intervention is likely more concerned with social change (socialism) than drugs, murders, crime, illegal immigration, or terrorism.

  5. Jim Haygood

    After 32 years of PRI and PAN-sponsored neoliberal policies, the economy continues to labor like a “burrito” (little donkey), gingerly taking “four steps forward,” followed by “four steps backward.”

    In fact, if one examines returns on the iShares country funds since their introduction in April 1996, Mexico (EWW) absolutely trounces all the others with an 11.64% annually compounded return through Oct. 2014. That compares to (for example) 7.95% for Canada (EWC), 5.32% for Spain (EWP) and 3.13% for the UK (EWU).

    Quijones may be right that Mexico is set up for another crisis (it does rather feel like 1994). But trying to write off Mexico’s rather good record of the past 20 years with reflexive condemnations of ‘neoliberalism’ doesn’t square with the facts.

  6. Demeter

    The only way to make change…to innovate…is by stopping what you are doing.

    If the only way to save Mexico is by driving it into revolution, if the only way to save the United States is with torches and pitchforks…then that’s what will happen. When elections are falsified, when leaders are unrepentantly and unstoppably corrupt, there truly is no alternative. Angela Merkel may live long enough to see that for herself. Margaret Thatcher didn’t.

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