Skip to main content
×
×
Home

A FATAL FLAW: DOMESTIC BANKS AND MEXICO’S INTERNATIONAL NEGOTIATING POSITION IN THE 1982 DEBT CRISIS

  • Sebastian Alvarez (a1)
Abstract

The recent European debt crisis has renewed interest as to why debtor countries honour their foreign debts and subscribe to respectively burdensome rescheduling conditions. While the cost of defaulting in a domestic financial system has been recognised as a main motive for repayment, the factors that cause sovereign states to refrain from debt repudiation are not fully understood. This article investigates the reasons behind the repayment decision and weak negotiating position of the Mexican government following the 1982 debt crisis. It shows that leading commercial banks had considerable amounts of external loans in their books, and that Mexican policymakers lacked the foreign exchange access they needed to secure the stability of the domestic banking system. The high exposure of domestic banks to Mexican debt and their heightened dependence on foreign capital worked as mechanisms that allowed international creditors to enforce their claims and deterred Mexico from declaring a unilateral default.

La reciente crisis de la deuda europea ha renovado el interés en por qué los países deudores pagan su deuda externa y aceptan pesadas condiciones de renegociación. Si bien los costos de un default para el sistema financiero doméstico han sido reconocidos como un motivo primordial de repago, los factores por los que disuade a los gobiernos de repudiar la deuda no se comprenden plenamente todavía. Este artículo investiga las razones detrás de la decisión de pago y la débil posición negociadora del gobierno mexicano en los albores de la crisis de la deuda de 1982. El artículo muestra que los bancos comerciales líderes tenían considerables montos de deuda externa mexicana en sus libros y que las autoridades mexicanas no disponían de las divisas necesarias para asegurar la estabilidad del sistema bancario doméstico. La exposición de la banca doméstica a la deuda mexicana y su alta dependencia del capital extranjero funcionaron como un mecanismo que le permitió a los acreedores internacionales hacer respetar sus demandas y desalentó a México de declarar un default unilateral.

  • View HTML
    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      A FATAL FLAW: DOMESTIC BANKS AND MEXICO’S INTERNATIONAL NEGOTIATING POSITION IN THE 1982 DEBT CRISIS
      Available formats
      ×
      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

      A FATAL FLAW: DOMESTIC BANKS AND MEXICO’S INTERNATIONAL NEGOTIATING POSITION IN THE 1982 DEBT CRISIS
      Available formats
      ×
      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

      A FATAL FLAW: DOMESTIC BANKS AND MEXICO’S INTERNATIONAL NEGOTIATING POSITION IN THE 1982 DEBT CRISIS
      Available formats
      ×
Copyright
Footnotes
Hide All
*

This project has received funding from the H2020-EU.3.6—SOCIETAL CHALLENGES—Europe in a Changing World—Inclusive, Innovative and Reflective Societies under grant agreement no. 649307. The project UPIER is financially supported by the HERA Joint Research Programme (www.heranet.info) which is co-funded by AHRC, AKA, PT-DLR, CAS, CNR, DASTI, ETAG, FCT, FNR, F.R.S.-FNRS, FWF, FWO, HAZU, IRC, LMT, MIZS, MINECO, NCN, NOW, RANNÍS, RCN, SNF, VIAA, VR and The European Community FP7 2016-2019, under the Socio-economic Sciences and Humanities programme. The author is grateful to Mary O'Sullivan, Jérôme Sgard and Gail Triner for useful comments and suggestions on earlier versions of this article as well as to the three anonymous reviewers for valuable feedback.

a

The Paul Bairoch Institute of Economic History, University of Geneva. sebastian.alvarez@unige.ch

Footnotes
References
Hide All
Archivo Histórico Banco de México, C3405Exp.8 – Activos Banco de México en agencias y sucursales en el exterior, 1982-85.
Bank of England Archive, 3A143/1, 2, 3, 4, 5, 6 – International Division Files: Possible Consequences of a Default by a Major Borrowing Country (Apocalypse Now), 1977-84.
Bank of England Archive, 3A195.1, 2 – Task Force to Consider Mexican Debt Problems, 1982-83.
Federal Reserve Bank of New York Archive, Box 108406 – Sam Cross Material: Chronological Files, 1981-87.
Federal Reserve Bank of New York Archive, Central Files, BAC 1982-88, C261 Mexico – Brasil.
Lloyds Bank Archive, F/1/BD/LAT/1 9249 – Argentina Rescheduling, 1982-83.
Foreign Banks of the Federal Financial Institutions Examination Council (FFIEC), Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (002 Report), 1981-82.
Comisión Nacional Bancaria y de Seguros, Boletín de indicadores financieros de la banca múltiple privada y mixta, 1982 (several issues).
Salomon Brothers, A Review on Bank Performance, 1982 Edition.
Alvarez, S. (2015): «The Mexican Debt Crisis Redux: International Interbank Markets and Financial Crisis, 1977-1982». Financial History Review 22 (1), pp. 79-105.
Alvarez, S. (2017): «Venturing Abroad: The Internationalisation of Mexican Banks Prior to the 1982 Crisis». Journal of Latin American Studies 49 (3), pp. 517-548.
Armingeon, K., and Baccaro, L. (2012): «The Sorrows of Young Euro: The Sovereign Debt Crisis of Ireland and Souther Europe», in N. Bermeo, and J. Pontusson (eds), Coping with Crisis: Government Reactions to the Great Recession. New York: Russell Sage Foundation, pp. 162-198.
Bértola, L., and Ocampo, J. A. (2012): The Economic Development of Latin America Since Independence. London: Oxford University Press.
Borensztein, E., and Panizza, U. (2009): «The Costs of Sovereign Default». IMF Staff Papers 56 (4), pp. 683-741.
Borensztein, E., and Panizza, U. (2010): «Do Sovereign Defaults Hurt Exporters?». Open Economies Review 21 (3), pp. 393-412.
Boughton, J. M. (2000): «From Suez to Tequila: The IMF As Crisis Manager». The Economic Journal 110 (460), pp. 273-291.
Boughton, J. M. (2001): Silent Revolution: The International Monetary Fund, 1979-1989. Washington, DC: International Monetary Fund.
Branford, S., and Kucinski, B. (1988): The Debt Squads: The US, the Banks and Latin America. London: Zed Books.
Broner, F. A.; Martin, A., and Ventura, J. (2010): «Sovereign Risk and Secondary Markets». American Economic Review 100 (4), pp. 1523-1555.
Bulow, J., and Rogoff, K. (1988): «Multilateral Negotiations for Rescheduling Developing Country Debt: A Bargaining-Theoretic Framework». Staff Papers - International Monetary Fund 35 (4), pp. 644-657.
Bulow, J., and Rogoff, K. (1989a): «A Constant Recontracting Model of Sovereign Debt». Journal of Political Economy 97 (1), pp. 155-178.
Bulow, J., and Rogoff, K. (1989b): «Sovereign Debt: Is to Forgive to Forget?». The American Economic Review 79 (1), pp. 43-50.
Cline, W. R. (1984): International Debt: Systemic Risk and Policy Response. Washington, DC: Institute for International Economics.
Cline, W. R. (1995): International Debt Reexamined. Washington, DC: Institute for International Economics.
Devlin, R. (1989): Debt and Crisis in Latin America: The Supply Side of the Story. Princeton, NJ: Princeton University Press.
Diaz-Alejandro, C. F. (1983): «Stories of the 1930s for the 1980s», in P. Aspe Armella, R. Dornbusch, and M. Obstfeld (eds), Financial Policies and the World Capital Market: The Problem of Latin American Countries. Chicago, IL: University of Chicago Press, Vol. I, pp. 5-40.
Diaz-Alejandro, C. F. (1984): «Latin American Debt: I Don’t Think We are in Kansas Anymore». Brookings Papers on Economic Activity 15 (2), pp. 335-403.
Diaz-Alejandro, C. F. (1985): «Good-Bye Financial Repression, Hello Financial Crash». Journal of Development Economics 19, 1-24.
Eaton, J., and Gersovitz, M. (1981): «Debt With Potential Repudiation: Theoretical and Empirical Analysis». The Review of Economic Studies 48 (2), 289-309.
Eichengreen, B. (1989): «The U.S. Capital Market and Foreign Lending, 1920-1955», in J. D. Sachs (ed.), Developing Country Debt and the World Economy. Chicago, IL: University Of Chicago Press, pp. 237-248.
Featherstone, K. (2015): «External Conditionality and the Debt Crisis: The ‘Troika’ and Public Administration Reform in Greece». Journal of European Public Policy 22 (3), pp. 295-314.
Frieden, J. A. (1987): «The Brazilian Borrowing Experience: From Miracle to Debacle and Back». Latin American Research Review 22 (1), pp. 95-131.
Gennaioli, N.; Martin, A., and Rossi, S. (2014): «Sovereign Default, Domestic Banks, and Financial Institutions». The Journal of Finance 69 (2), pp. 819-866.
Giddy, I. H. (1981): «Risk and Return in the Eurocurrency Interbank Market». Greek Economic Review August, pp. 158-186.
Grossman, H. I., and Van Huyck, J. B. (1988): «Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation». The American Economic Review 78 (5), pp. 1088-1097.
Gurría, J. A. (1988): «Debt Restructuring: Mexico as a Case Study», in S. Griffith-Jones (ed.), Managing World Debt. New York: St. Martin’s Press, pp. 64-112.
Guttentag, J. M., and Herring, R. J. (1985): «Funding Risk in the International Interbank Market», in W. J. Ethier, and R. C. Marston (eds), International Financial Markets and Capital Movements: A Symposium in Honor of Arthur I. Bloomfield. Princeton, NJ: Princeton University, pp. 19-32.
Guttentag, J. M., and Herring, R. (1986): «Disaster Myopia in International Banking». Essays in International Finance no. 164, Department of Economics, Princeton, NJ: Princeton University.
Kraft, J. (1984): The Mexican Rescue. New York: Group of Thirty.
Krugman, P. R. (1994): «LDC ‘Debt Policy: 1’», in M. Feldstein (ed.), America Economic Policy in the 1980s. Chicago, IL: University of Chicago Press, pp. 691-722.
Lane, P. R. (2012): The European Sovereign Debt Crisis. Journal of Economic Perspectives 26 (3), pp. 49-68.
Lindert, P. H., and Morton, P. J. (1989): «How Sovereign Debt Has Worked», in J. D. Sachs (ed.), Developing Country Debt and the World Economy. Chicago, IL: University of Chicago Press, pp. 225-236.
Moffitt, M. (1984): World’s Money: International Banking from Bretton Woods to the Brink of Insolvency. New York: Simon and Schuster.
Park, K. H. (2015): «Lessons and Implications from the European Sovereign Debt Crisis». Journal of Finance and Economics 3 (3), pp. 72-88.
Reinhart, C. M., and Rogoff, K. S. (2009): This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.
Reinhart, C. M., and Rogoff, K. S. (2011): «From Financial Crash to Debt Crisis». American Economic Review 101 (5), pp. 1676-1706.
Rhodes, W. R. (2011): Banker to the World: Leadership Lessons From the Front Lines of Global Finance. New York: McGraw-Hill.
Rieffel, A. (2003): Restructuring Sovereign Debt: The Case for Ad Hoc Machinery. Washington, DC: Brookings Institution Press.
Rose, A. K. (2005): «One Reason Countries Pay their Debts: Renegotiation and International Trade». Journal of Development Economics 77 (1), pp. 189-206.
Sachs, J. (1989): «The Debt Overhang of Developing Countries», in G. Calvo, R. Findlay, P. Kouri, and J. Braga de Marcelo (eds), Debt, Stabilization and Development: Essays in the Memory of Carlos Díaz-Alejandro. Oxford: Basil Blackwell, pp. 80-102.
Sachs, J. D. (1986): «Managing the LDC Debt Crisis». Brookings Papers on Economic Activity 1986 (2), 397-440.
Sachs, J. D. (1989): «New Approaches to the Latin American Debt Crisis». Essays in International Finance no. 174, Department of Economics, Princeton, NJ: Princeton University.
Sandbu, M. (2015): Europe’s Orphan: The Future of the Euro and the Politics of Debt. Princeton, NJ: Princeton University Press.
Sapir, A.; Wolff, G. B.; De Sousa, C., and Terzi, A. (2014): The Troika and Financial Assistance in the Euro Area: Successes and Failures. Brussels: European Parliament.
Secretaria De Hacienda Y Crédito Público. (1988): Deuda externa pública mexicana. Mexico City: Fondo de Cultura Económica.
Sgard, J. (2002): L’économie De La Panique: Faire Face Aux Crises Financières. Paris: Ed. La Découverte.
Sturzenegger, F., and Zettelmeyer, J. (2006): Debt Defaults and Lessons from a Decade of Crises. Cambridge, MA: MIT Press.
Suter, C., and Stamm, H. (1992): «Coping with Global Debt Crises Debt Settlements, 1820 to 1986». Comparative Studies in Society and History 34 (4), pp. 645-678.
Tomz, M. (2007): Reputation and International Cooperation: Sovereign Debt across Three Centuries. Princeton, NJ: Princeton University Press.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Revista de Historia Economica - Journal of Iberian and Latin American Economic History
  • ISSN: 0212-6109
  • EISSN: 2041-3335
  • URL: /core/journals/revista-de-historia-economica-journal-of-iberian-and-latin-american-economic-history
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed