Mexico Bailout Mistakes
As U.S. lawmakers are under pressure to vote the $700 billion rescue plan, there is an unsuccessful government in history which may make U.S. to pay attention:
Mexico decided to buy bad debt from banks that faced failure after the currency fell as much as 65 percent in December 1994 and Treasury-bill rates shot up to more than 80 percent. The government wasn't able to ease the credit crunch, and the Mexico's bailout, which the government said was needed to protect savings and homeowners, ended up costing taxpayers an estimated 20 percent of gross domestic product and slowed growth as credit dried up for consumers and small businesses instead of being re-activated.
The government issued Treasury notes to buy the bank loans at book value and then got pennies on the dollar with they resold them. Meanwhile, Mexican banks profited on the Treasury bills they received in exchange for bad loans, giving them a steady source of income and less incentive to provide loans to small businesses and consumers. Credit plummeted for more than a decade, delaying a recovery in wages and employment. The banks' outstanding loans dropped by more than half to 1.08 trillion pesos at the end of 2004 from 2.22 trillion pesos a decade earlier. Consequently, the biggest asset in their balance sheet was government paper and made a lot of money on these instruments.
Many Mexicans stopped paying on home, car and other loans after the government announced it was bailing out the banks, creating a phenomenon that Mexican bankers at the time labeled the ``culture of not paying.'' The ridiculously lasting legacy of the Mexican crisis is that credit functions dried up because of this culture of not paying. That's what Washington needs to be the most on the lookout for.
The lack of capital in the Mexican financial system finally was resolved when foreign banks, such as Citigroup Inc., Banco Santander SA and HSBC Holdings PLC bought the country's four largest banks. It altered Mexico's financial system, eventually putting the country's four largest banks and 77 percent of all banks by assets in foreign hands.
The Mexican rescue was much more wild and disorderly than expected. Also it lent a lot to corruption because it was open-ended. Although Mexico suffered such a pain for a long period, the country did end up with tougher regulations that put the banks on more solid footing and the banks are now in very good shape.
Many of the mistakes happened in Mexico were rooted in a lack of oversight, and there's a basic similarity to U.S., in the sense that the federal government is attempting to have an extremely broad capacity to conduct all types of activities with very weak oversight by Congress. Learn from failure? Let’s see.
Mexico decided to buy bad debt from banks that faced failure after the currency fell as much as 65 percent in December 1994 and Treasury-bill rates shot up to more than 80 percent. The government wasn't able to ease the credit crunch, and the Mexico's bailout, which the government said was needed to protect savings and homeowners, ended up costing taxpayers an estimated 20 percent of gross domestic product and slowed growth as credit dried up for consumers and small businesses instead of being re-activated.
The government issued Treasury notes to buy the bank loans at book value and then got pennies on the dollar with they resold them. Meanwhile, Mexican banks profited on the Treasury bills they received in exchange for bad loans, giving them a steady source of income and less incentive to provide loans to small businesses and consumers. Credit plummeted for more than a decade, delaying a recovery in wages and employment. The banks' outstanding loans dropped by more than half to 1.08 trillion pesos at the end of 2004 from 2.22 trillion pesos a decade earlier. Consequently, the biggest asset in their balance sheet was government paper and made a lot of money on these instruments.
Many Mexicans stopped paying on home, car and other loans after the government announced it was bailing out the banks, creating a phenomenon that Mexican bankers at the time labeled the ``culture of not paying.'' The ridiculously lasting legacy of the Mexican crisis is that credit functions dried up because of this culture of not paying. That's what Washington needs to be the most on the lookout for.
The lack of capital in the Mexican financial system finally was resolved when foreign banks, such as Citigroup Inc., Banco Santander SA and HSBC Holdings PLC bought the country's four largest banks. It altered Mexico's financial system, eventually putting the country's four largest banks and 77 percent of all banks by assets in foreign hands.
The Mexican rescue was much more wild and disorderly than expected. Also it lent a lot to corruption because it was open-ended. Although Mexico suffered such a pain for a long period, the country did end up with tougher regulations that put the banks on more solid footing and the banks are now in very good shape.
Many of the mistakes happened in Mexico were rooted in a lack of oversight, and there's a basic similarity to U.S., in the sense that the federal government is attempting to have an extremely broad capacity to conduct all types of activities with very weak oversight by Congress. Learn from failure? Let’s see.
posted by Jiu Zhuang at
8:20 PM
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