Mexico's 15 Minutes Of Fame Aren't Over Yet
AS Joseph P. Kennedy told it, when his shoeshine boy started giving him stock tips, he knew it was time to sell. And he did, in early 1929, getting out of the market and preserving the family fortune.
In November 1994, here in Mexico City, Mexico's largest bank, Banamex, offered a credit card to my wife's chauffeur, an employee of her small company, who makes the minimum wage. He was hardly an exception; credit cards were being thrust upon almost all who had any demonstrable income. By Kennedy's standard, that should have been the warning sign that the bubble was about to burst.
It did. The very next month, the peso began its precipitous devaluation to about half its value before Dec. 20. But that isn't why panic spread throughout Western economies. Except for a slight loss of market by a few Fortune 500 companies, Wall Streeters couldn't care less about the Mexican economy. The only real concern was that Mexico would default on its debts. No payments on its bonds would hurt many United States investors. The truth that a higher yield (which Mexican investments pay) always implies a greater degree of risk was immaterial. The pampered US investor was coddled by the politically inspired US-initiated $50 billion loan package.
Now, however, it appears that Mexico's 15 minutes of fame are over. The front-page headline of the May 23 edition of La Jornada, one of Mexico's three most reliable newspapers, read: "The Strong Medicine Is Working: Christopher"; and underneath, in larger type, "The Mexican Crisis Resolved: IMF."
Yes, said the article, "the situation is under control," according to Michel Camdessus, managing director of the International Monetary Fund. Reading between the lines, what Secretary of State Warren Christopher and Mr. Camdessus meant had little to do with the actual Mexican economic situation or the plight of the Mexican citizenry. All that counts is the now-guaranteed status of payments to creditors.
The truth is that the Mexican economic crisis is just beginning and will become far worse - with devastating repercussions in the United States - than the "experts" are willing to recognize. Or maybe they know it but won't admit the obvious.
On the same page of La Jornada May 23, it was reported that the construction industry of the state of Nuevo Leon (site of the industrial city of Monterrey) was operating at 30 percent of its capacity and has had to lay off 30,000 employees. That's in the most prosperous part of the country.
Newspapers are now reporting that 54 to 61 percent of all Mexican credit card holders are simply not paying. Purchases with plastic are stated as being down 17 percent. That figure seems low; my wife and I were in the supermarket recently and witnessed cards being rejected by cashiers on both sides of us.
Overdue loans to banks are six times as high as what is considered the danger level in the US. A citizens' group of debtors has been formed and is becoming a political force with its demands for across-the-board restructuring.
Mexican bank credit cards have always charged huge monthly interest rates - many times those charged in the US - and Banamex and Bancomer (No. 2 in Mexico) became among the most profitable banks in the world. Now, however, rates are out of control to the extent that they are paralyzing the country's economy.
I just got a notice from Bancomer in the mail. It's going to do all of its Visa credit card holders a huge favor. Forty percent was featured in bold type at the top of the announcement. Bancomer is going to reduce its annual interest rate charged on outstanding balances by 40 points - from 120 to only 80 percent.
If you own a small business, forget about credit; the rates (about 90 percent) are just too exorbitant. It is estimated that more than half of Mexico's 2 million small businesses are close to bankruptcy.
Automobile sales and construction starts for the first three months of 1995 are less than half of 1994 levels. It is estimated that at least a million workers will lose their jobs this year. That, combined with the 800,000 Mexicans who will reach 18 years of age this year with meager prospects of employment, will create a dangerous social climate - not only for Mexico. If the United States thinks it can isolate itself from its neighbor's problems, it's wrong. The still porous border is almost 2,000 miles long.
Also dead wrong is Larry Summers, undersecretary of the Treasury, when he says that the crisis "was economic, not political," and "global, not regional." The cause of this crisis - and the crises of 1982 and '87 - definitely is political. The political immaturity of Mexico, especially its corrupt one-party system, leads to poor decisionmaking and an invariably flawed economy. The Mexican people are paying dearly for the sins of their rulers. The US and the IMF have seen to that.
It's not over at all; Mexico's 15 minutes of fame will have Biblical proportions.