Mexico hedges all of its oil export

We have witnessed a bunch of crisis here: subprime-mortgage crisis, hedge fund redemption crisis, derivatives crisis and of course, commodity crisis. Oil prices hit an all-time high of $147.27 a barrel in July but have since fallen to less than $65 as the global economy cools. Some economies largely depending on oil have been hard hit. Some countries have taken actions to protect themselves from the falling oil price.

Mexico, the world’s sixth biggest oil producer hedged almost all of next year’s oil exports at prices ranging from $70 to $100 at a cost of about $1.5bn through derivatives contracts. This is the sign showing the concerns of concerns of producer countries at the impact of the global economic slowdown on their revenues, as Mexico relies on oil for up to 40 percent of government revenue. Last year, Mexico only hedged about 20-30 percent of its oil exports.

These trades appeared to have occurred in late August and early September, at that time the oil was traded within $90-$110. So the hedge seems a good move and a presumed cost of some $1.5bn is immaterial relative to risks. Without the hedge, the recent price falls would have been a serious concern for Mexico.

Actually there were already signs that a big producer was hedging over this summer as traders in New York noted a significant surge in options for December 2009. Mexico’s action could have added some downward pressure to spot oil prices as some banks including Barclays Capital and Goldman Sachs, who predicting the oil price would be remain at $150 by the end of year, offloaded some of their risk, selling futures.

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.