1. Introduction
World economic downturns are frequently accompanied by waves of government debt defaults and, in extreme cases, expropriations. Last year, The Economist estimated that fifty-three emerging economies were on the brink of default, while expropriation risk is estimated to be on the riseFootnote 1. The literature on sovereign debt has analysed the links between both types of events. In a nutshell, such government policies are grouped into the broad concept of «sovereign theft», where a government decides unilaterally to reduce investors' returnsFootnote 2. While scholars have developed theoretical models and established broad statistical correlates, we know less about how these kinds of events have been interlinked in the past. In this article, I revisit Mexico's debt crisis of 1982. I show that the loss in terms of reputation in financial markets due to the banks' expropriation was higher than previously assumed and affected the gravity of the crisis. Using archival material, contemporary press articles and government bond prices, I find that the government's negotiations with the International Monetary Fund (IMF) were delayed, resulting in an upsurge in default risk, which may have had an impact on investment and, therefore, on the country's economic recovery.
Mexico's debt crisis has played a prominent role in the history of financial crises. It marked the beginning of the so-called Latin American debt crisis, whereby many governments from low- and middle-income countries experienced difficulties repaying their debtsFootnote 3. The early 1980s also constituted a turning point in the volume of foreign capital flowing to developing countries. Since the mid-1970s, Latin American governments borrowed large sums of capital from syndicates of western commercial banks, via the Euroloan market. On 20 August 1982, Mexico's Finance Minister Jesus Silva-Herzog publicly announced a 3-month moratorium on all amortisation payments due to bank loans to the public sector. According to the literature, the fragile debt position of the government was largely unanticipatedFootnote 4. The announcement prompted the IMF, the Bank for International Settlements (BIS) and the U.S. government to adopt measures to avert a crisis that had the potential to severely affect the United States and, by extension, the world banking system. These measures were intended to provide financial support to Mexico's government and to coordinate the activities of creditor banks. Negotiations between Mexico and creditor banks continued until a rescheduling agreement was reached in December 1982.
Mexico's moratorium announcement was followed, on 1 September 1982, by the President's decision to expropriate the banks and to impose exchange controls. There is a contentious issue in the literature regarding the reasons for this move. One straightforward reason is related to the economic crisis, as some government staff members blamed the banks for promoting capital flight, thus putting further pressure on the exchange rate. Political scientists have favoured political reasons, thereby emphasizing the conflicting position between Mexico's government and its banking sectorFootnote 5. Authors supporting this view posit that the government sought to impose its vision on development, to expand the role of the state in the economy, and to exert its power against an elite whose activities ran counter to the government's social goals.
However, these explanations leave barely any room for external factors. In cases where the literature has analysed the role of external factors, it has focused on the interbank market as a major motive for the government's nationalisation of its banks. Certain scholars claim that Mexico's bargaining power during the debt negotiations was weak because Mexican banks were heavily exposed to massive withdrawals through the interbank market (Kraft Reference Kraft1984; Alvarez Reference Alvarez2018). Furthermore, as the literature on sovereign defaults argues, Mexican banks had been very active participants in the bank syndicates that were established to lend to Mexico's private and public borrowers. Therefore, a default could have triggered a major banking crisis. Alvarez (Reference Alvarez2019) argues that the bank nationalisation served to support Mexico's banking system which was on the brink of collapse. This author suggests that international bankers considered this to have been a policy welcomed by foreign creditors as the government would take charge of the banks' debts.
This article adopts a different perspective and shows that external factors are relevant in explaining the timing of the expropriation. Contrary to previous works, I argue that the banks' nationalisation contributed to the aggravation of the crisis. I depart from the existing literature on sovereign theft, wherein it is posited that the likelihood of an expropriation during a debt crisis increases when a government's reputation is lost to foreign investors. According to this literature, the decision to default considers the costs and benefits of such a decision, including reputational damage in international financial markets. A sovereign default might lead to a government's exclusion from capital markets and a rise in interest rates for future loans, but it might also generate spillover effects for other kinds of relationships between the government and international investors.
The main contributions of this article are twofold. First, I show that the expropriation complicated the negotiations between the IMF and the Mexican government. Archival evidence shows that the government's sense of urgency further weakened its bargaining position with the IMF. Second, I present an analysis of the yield premium on bonds denominated in foreign currency (sterling pounds), on which the government had not defaulted, and demonstrate that international markets did not welcome the expropriation. Contrary to the prevailing claim that international markets welcomed the bank nationalisation, I show that the event was perceived as an attack against private property, running contrary to the creditors' beliefs about the kinds of policies that were needed to boost economic recovery. Therefore, bankers and international organisations reacted negatively to the bank's nationalisation even if, from a comparative perspective, the moratorium provided a major blow to confidence in the government's economic policies.
The reminder of this article is organised as follows. In the first section, I introduce the concept of sovereign theft, and argue that after defaulting, the probability of expropriation increased, given both the poor economic performance of the country and the costs in terms of external reputation. In section 2, I provide a brief overview of the literature on Mexico's debt crisis and the bank nationalisation. I show that previous research has not adequately analysed the consequences of nationalisation on Mexico's risk premium and on the debt crisis. In section 3, I analyse the relationships between sovereign defaults and expropriation episodes internationally. I pursue a set of statistical tests to show that the macroeconomic performance of expropriating and non-expropriating countries was dissimilar and demonstrate that expropriating countries performed worse in most variables. In section 4, I provide evidence of the impact of nationalisation on negotiations with the IMF and on default risk. Section 5 concludes.
2. Sovereign theft: A Theoretical Framework
Historical evidence shows that episodes of expropriation and sovereign defaults rarely coincide. However, the number of studies analysing these relationships is extremely limited. Tomz and Wright (Reference Tomz, Wright, Hogan and Sturzenegger2010) find that between 1929 and 2004, sovereign defaults and expropriations occurred in waves, even though they did not coincide in time. They also posit that at a country-level analysis, two groups of countries could be distinguished, representing 70 per cent of their sample. One group of countries had neither expropriated nor defaulted, whereas the other group was formed by countries that had defaulted and expropriated at least once, even if not simultaneously. Similarly, Eden et al. (Reference Eden, Kraay and Qian2012) found that countries with a past record of expropriations have a higher likelihood of future expropriations and defaults. These authors claim that expropriations are prone to take place during «good times». Tomz and Wright (Reference Tomz and Wright2007) showed that countries default during bad times, even though this relationship has been historically weak.
Tomz and Wright (Reference Tomz, Wright, Hogan and Sturzenegger2010) introduced a model in which a government's incentives to engage in sovereign theft depend on the state of the economy, the risk aversion of political leaders and the types of penalties stemming from defaulting and retaliation. The relevance of a retaliation in influencing a government's behaviour depends on the severity of the penalties from foreign creditors (in the case of a default), from foreign investors (in the case of an expropriation), and whether these penalties are shared across creditors and investors. The analysis contemplates a sequential model in which investments occur before a government receives a loan, whereas loans are repaid before profits are distributed. Thereafter, the government first decides whether to default or repay the loan. At a second stage, the government must decide whether to expropriate the earnings of the direct investors. The resulting prizes for the government hinge on its utility function, whose parameters depend on the prevailing costs and benefits of defaulting and expropriating.
First, we consider the benefits of default. The resources that a government saves from retained debt service can be used for other purposes. According to Bértola and Ocampo (Reference Bértola and Ocampo2013), this was why many governments in Latin America decided to default at the onset of the Great Depression, as they could invest in domestic infrastructure and the provision of credit to boost economic activity. Generally, a decision to default depends on both economic and political factors. A government could be incentivised to divert the resources devoted to servicing its external debt to boost economic activity, thereby increasing the probability of its re-election (or increasing its social base). In this regard, the proximity of elections has been identified as a variable positively related to sovereign defaultsFootnote 6.
Nevertheless, sovereign defaults are expensiveFootnote 7. A government that defaults is excluded from capital markets and will face higher borrowing costs in the future (Suter Reference Suter1992; Tomz Reference Tomz2007; Catão and Mano Reference Catão and Mano2017). Other types of costs include a decrease in international trade and, in extreme cases, a loss of sovereignty through the establishment of supervisory mechanisms or through the use of gunboat diplomacyFootnote 8. The capacity to sanction depends upon the identity of the lender and whether their coordination mechanisms can exclude a government from accessing new funds. Amador (Reference Amador2004) argues that unstable countries are less capable of evading the costs of default through increased savings, and thus, they face a persistent need to borrow externally. Therefore, and rather counterintuitively, these countries would be more prone to avoiding default.
Reputation plays a key role in the literature on sovereign defaults. A default may have a negative impact on a government's creditworthiness, which implies that borrowing could become more costly in the future (Catão and Mano Reference Catão and Mano2017). One may ask how these elements differ from the decision to expropriate. Under the assumption of incomplete information, foreign investors do not know ex-ante the preferences of government. An expropriation may have an impact on their perception of the value that a government grants for future loans. Foreign investors interpret an expropriation as a government's least favourite preference for maintaining good relations with them. In turn, these perceptions may have a negative effect on the expected value of potential future projects, thereby triggering a decline in the levels of a country's foreign investment.
Overall, the cost-benefit calculation behind a government's decision to default does not entirely differ from the decision to expropriate. Two major benefits can be derived from expropriations. In equity contracts, expropriations can be directly related to business cycles. On the one hand, recessions can be propitious periods to expropriate. In these cases, a government may decide to expropriate out of «desperation» when public revenues decline and the need to increase spending mounts. On the other hand, an upward trend in the business cycle can also increase the temptation to expropriate. In those cases, «opportunism» may lead a government to expropriate, as the amount to be gained from expropriation is at its highest level. Finally, a government can gain control over operations, projects and transfer factors of production from foreign investors to the host country (Tomz and Wright Reference Tomz, Wright, Hogan and Sturzenegger2010). Nevertheless, there may be risks if a firm is vertically integrated with other firms internationally, which may raise other difficulties.
A final question concerns the timing of expropriations and sovereign defaults, and whether they should coincide or be spaced out. Either action may trigger a negative perception of a government, which would then be qualified as «unreliable». Cole and Kehoe (Reference Cole and Kehoe1998) introduce spillover effects to show that debt defaults can affect other arenas. These authors illustrate their theoretical model with the 1985 decision of Peru's President Alan García to default and pursue a series of nationalisations during his stay in office. After defaulting, he expropriated foreign oil companies and, a couple of years later, banks and insurance companies. Peru's initial reputation was severely damaged and capital flight reacted very rapidly, so the cost of expropriation, along with foreign investment, declined sharply as investors relocated their assets abroad. The basic message of this model is that a government might minimise its costs if it decides to default and expropriate simultaneously.
Cole and Kehoe's (Reference Cole and Kehoe1998) analysis is motivated by the relevance of a government's reputation as a major incentive to repay its foreign debt, and places sovereign debt on the same foot as other arenas in which trust in a government is important. Contrary to Tomz and Wright's (Reference Tomz, Wright, Hogan and Sturzenegger2010) model, the sequence of events is not relevant. The basic assumption that both models share is the existence of spillover effects, even if the nature and intensity of the costs and benefits from either default or expropriation differ. In this regard, according to Cole and Kehoe (Reference Cole and Kehoe1998), the sequential narrative of events is secondary. A direct implication of the model is that an expropriation might have an impact on default risk, as creditors assume that a government is not trustworthy and may default in the future.
A major question that emerges is whether these models can be applied to Mexico's 1982 crisis. Previous works on Mexico's expropriation decision have emphasised the country's political context, including Mexico's authoritarian regime. While none of the models on sovereign theft mention the role of political institutions, a large body of literature shows that the level of a country's expropriation risk depends on political variables, including the political regime and the political orientation of the government in powerFootnote 9. Therefore, rather than contradicting these works, the economic costs of defaulting and expropriation emphasised in the models of sovereign theft can be seen as complementary to the political context under which expropriation took place.
3. Mexico's Debt Crisis of 1982 and its Banking Nationalisation
Mexico's debt crisis has been analysed from a more general perspective in Latin America and in the context of increased financial integrationFootnote 10. Broadly speaking, the literature has provided three major categories of reasons for Latin America's debt crises. The first group of reasons relates to the functioning of international financial markets. Scholars favouring this explanation posit that the years preceding the crisis had high international liquidity and increasing current account problems in developed countries, prompting Western commercial banks to increase their lending to developing countries through the Eurodollar marketFootnote 11. This perspective suggests that the beliefs system was shared by regulators, governments in creditor countries and international organisations such as the IMF and the OECD. It has been echoed by various scholars, including Kahler (Reference Kahler1985), Wellons (Reference Wellons1985), Devlin (Reference Devlin1989) and Altamura and Flores Zendejas (Reference Altamura and Flores Zendejas2020), who situate the role of politics and the existence of creditor countries' implicit support for their banks as the main factors boosting the 1970s lending boom.
A second group of explanations focuses on macroeconomic imbalances in Mexico and, more generally, in Latin America. Cline (Reference Cline1983) emphasises the general increase observed in debt levels, differentiating between non-oil and new oil exporters such as MexicoFootnote 12. This group of theories has been challenged by scholars such as Sachs (Reference Sachs1985) or Bértola and Ocampo (Reference Bértola and Ocampo2013) because these imbalances only increased in the year before the crisis. Furthermore, these authors claim that macroeconomic variables do not accurately differentiate countries that defaulted from those that did not. A final group of theories that analyses the relationships between Northern and Southern countries argues that changes in world economic conditions, including declining terms of trade and a general rise in interest rates, lie at the heart of Latin America's debt crisis (Diaz-Alejandro et al. Reference Diaz-Alejandro, Krugman and Sachs1984)Footnote 13.
How is the debt crisis related to the bank nationalisation in Mexico? For certain protagonists who have published their experiences, Mexico's bank nationalisation was a consequence of the economic and debt crisesFootnote 14. However, this deteriorating macroeconomic context is not the only factor behind the decision, and scholars have provided other, personal and political reasonsFootnote 15. The decision by President López Portillo to blame the banks for Mexico's economic crisis—summarised in the now infamous phrases «They have looted us. Mexico is not finished. They will not loot us again»—has been studied from different anglesFootnote 16. One concerns the roots of the government's decision. Turrent (Reference Turrent Díaz2009) emphasised the role of an inner circle of economists who favoured the establishment of a planned economy, for which the banking sector played a key role. One economist advising the president was Carlos Tello, who has emerged in the literature as both a scholar and a major protagonist who became the head of the central bank in the aftermath of nationalisation. Tello (Reference Tello1984) describes the need for nationalisation given the necessity of ending the high concentration of the banking sector, deemed as being strategic from a developmentalist perspective.
A predominant perception of the bank nationalisation emphasises political struggles—also influenced by ideological disputes—within the context of an economic crisis. Elizondo Mayer-Serra (Reference Mayer-Serra2005) identifies three major dimensions behind the president's move. The first dimension was ideological and concerned the role of the state in the economy and the need to continue the direction established during the Mexican Revolution, when banks had been considered an enemy. The second dimension is financial, where capital flight could only be averted by the bank nationalisation and the imposition of exchange controls. Domestic banks were blamed for fostering capital outflows in the months prior to the crisis, thereby contributing to currency devaluation. Finally, Elizondo Mayer-Serra (Reference Mayer-Serra2005) identified a political (and personal) dimension, whereby the president's intention was to show that he remained in power and, therefore, was still able to act against those who had originally speculated against the currency.
From a long-term perspective, Elizondo Mayer-Serra (Reference Elizondo Mayer-Serra2001) and Haber (Reference Haber2006) underscore the negative impact of an economy with poorly defined property rights on the banking sector's performance. In the same vein, Del Ángel and Martinelli Montoya (Reference Del Ángel and Martinelli Montoya2009) argue that even if the decision to nationalise might have been a mistake, it was not irrational. These authors posit that relations between the government and banks had been tense since at least the early post-revolutionary period. As a result, the government was able to eventually expropriate without costs. The question is why, given the banks' vulnerability, the expropriation did not occur earlier. According to these authors, the banks' expropriation served to consolidate the power of an authoritarian regime such as the one prevailing in Mexico. One reason banks had not been expropriated before was because the government could extract rents from the private banks, but once this was no longer the case, such a policy could be implemented because other social groups also perceived it as necessary to confront the crisis.
Maxfield (Reference Maxfield1990) also emphasises the conflict between the government (in particular, the national populists) and a bankers' alliance, which encompassed a financial–industrial conglomerate that had profited from increased integration with the world economy, thereby hindering the state's capacity to allocate bank credit. For this scholar, the president was «acorralado por los hechos» (cornered by events) and undertook a «defensive, last-resort measure» (Maxfield Reference Maxfield1990, p. 142). She perceives the nationalisation and exchange control policies as failures as they did not break the power of the financial–industrial conglomerates and did not solve the state's financial situation.
One of the reasons for nationalisation is that it was the government's reaction to a looming banking crisis (Del Ángel Reference Del Ángel, Del Ángel, Bazdresch Parada and Suárez Dávila2005). Such a claim is not surprising given that sovereign defaults and banking crises have been interlinked in the literature on sovereign debt. Scholars such as Reinhart and Rogoff (Reference Reinhart and Rogoff2011) have argued that domestic banks may be particularly exposed to the risk of default by their own governments, as this would severely affect their portfolios. However, Haber (Reference Haber2006) posits that this was not the case in Mexico, as the central bank bought treasury-issued bonds. Banks may have been affected by the devaluation of the currency. In fact, currency crises could also have a negative effect on banks that have been exposed to currency risk through international transactionsFootnote 17.
Various scholars have supported the idea that bank nationalisation was an attempt by the Mexican government to bail out its banks. Elizondo Mayer-Serra (Reference Elizondo Mayer-Serra2001, p. 179) posits that international bankers received the news with «relief», as the government would be responsible for the banks' debts. According to Alvarez (Reference Alvarez2019), Mexico's banking system was fragile in the months before the crisis. To a large extent, this was not very different from the position of other banks in Latin America, including Brazil and Chile, which would experience a severe shock during the debt crisis. Mexico's government adopted a supportive attitude towards its banks, particularly those with foreign branches and who were active in the interbank market. Furthermore, these banks also had a large exposure to the country's public debt. Alvarez (Reference Alvarez2019, p. 185) reported that the largest commercial banks had foreign loans that represented from three to ten times their total capital. This condition weakened Mexico's bargaining position in its quest for a debt rescheduling. Alvarez (Reference Alvarez2019) suggests that foreign creditors did not necessarily see the Mexican nationalisation as a problem because the banks' liabilities would become part of the government's public debt. This new landscape reduced the risk of exclusion from interbank credit and facilitated the negotiations with the IMF.
While Mexican bankers complained that their international counterparts did not raise their voices to show solidarity with such an arbitrary policy, this perspective needs to be qualified, to say the leastFootnote 18. First, Tello (Reference Tello1984, p. 126) admitted that he did not expect the decision to be popular among the international financial community or the U.S. government. Second, contrary to the supposed «relief» by international bankers, Boughton (Reference Boughton2000, p. 301) reports that there was a panic in the interbank market on 7 September, 1 week after nationalisation, as international banks refused to roll over lines of credit to Mexican banks, severely undermining their position. Third, President López Portillo himself declared that the plan to nationalise the banks was not intended to rescue the bankers or to guarantee the repayment of Mexico's private debt, but, rather, to reduce the speculative bubble that started in the early months of 1982 (López Portillo Reference López Portillo2008, p. 266). Finally, the government could have committed to guaranteeing the banks' debts, as it eventually did, without nationalizing the banks. As we will demonstrate, evidence from the press, the IMF and bond risk premia show a negative reaction to the nationalisation.
4. Expropriations and Debt Defaults, 1966–1982
What is the empirical evidence of the default and expropriation episodes for the year before the crisis? We divided the sample between countries that expropriated at least once and those that did not. A first statistical overview shows that the first group (expropriators) defaulted 7 per cent of the time, whereas the second group (non-expropriators) defaulted 2 per cent. A Welch two-sample t-test shows that the means' difference is significantFootnote 19. A more precise perspective of this relationship is provided in Figure 1, where we depict the correlation between the frequency of defaults and the frequency of expropriations between 1966 and 1982Footnote 20. We divided the full set of countries into two groups using the K-means clustering technique (James et al., Reference James, Hastie, Tibshirani and Witten2013, p. 523). We utilised an algorithm to determine the point at which the distance between the points was minimised to a centroid. The algorithm then implements successive iterations until the optimal number of clusters is defined. We repeated this procedure with bootstrap and using the Within Sum of Square (WSS) specification and found that the optimal number was two clustersFootnote 21.
Default and expropriation ratios.
Source: See text.
Figure 1a shows the cluster of countries with a higher number of expropriations and defaults, including Algeria, Peru and Mexico. It is noteworthy that the relationship between both variables is negative even if the slope is not pronounced. Figure 1b shows that at lower levels of expropriations and defaults, the correlation between both variables is positive. We added 95 per cent confidence intervals as shaded areas to account for the low number of observations. Figure 1 suggests that above a certain number of sovereign theft episodes, the drivers of defaults and expropriations might converge, even if we only computed three cases of expropriation and defaults during the same year (Chile in 1972 and 1973, and Ghana in 1974).
Mexico's case suggests that the state of its economy could have been highly relevant in explaining its default and expropriation events in 1982. They occurred at the onset of a downturn in the business cycle. The country had been experiencing a decline in growth rates and a squeeze in public finance. The loans contracted by the government had variable rates and were adjustable every 6 months. Therefore, in a period of rising interest rates in the world economy, the debt burden increased, and the incentive to default escalatedFootnote 22. This condition also coincided with a decline in commodity prices, particularly oil prices, which reduced public revenues sharply. The crisis accelerated after an initial devaluation in February 1982, with a continuous fall in international reserves. Therefore, given the sequence of events, the default should have increased the probability of expropriation as a «desperation» reaction.
What is the role of macroeconomic indicators in the frequency of sovereign theft episodes? We now focus on the difference between countries that expropriated at least once and those that did not during the years before the crisis (1977-1982)Footnote 23. We compared the means of a group of representative indicators and pursued a mean equality test (t-test) between both groups of countries for the following variables: economic growth (real per capita GDP growth), level of public debt (debt to GDP ratio), budget balance (as a ratio to GDP), current account balance (to GDP), level of public investment (to GDP), inflation, reserve to money supply ratio, average nominal exchange rate depreciation (percentage changes of domestic currency to the U.S. dollar) and risk premia (spreads) of syndicate bank loansFootnote 24.
Table 1 presents the results. On average, expropriating countries display lower economic growth, higher debt, lower public investment, higher inflation rates and larger fiscal deficits. Their currencies also exhibit higher levels of depreciation to the U.S. dollar. The means' differences in reserves, exports and current account balances were not statistically significant. Figure 2 presents the evolution of each indicator divided between the expropriating countries (group 1) and the rest (group 0). Notably, the differences in most indicators are persistent and even widen in certain cases between both groups of countries (in particular, inflation, exchange rate depreciation and public investment levels).
Mean equality tests, macroeconomic indicators
Notes: The P-value in parentheses.
(*) Significant at the 10 per cent; (**) significant at the 5 per cent; (***) significant at the 1 per cent and (no) not significant.
Macroeconomic indicators. Inflation is reported as average percentage increases. Exchange rate is average annual change, in percentage, of the nominal exchange rate between a currency and the US dollar.
Source: See text. Figures reported as percentages.
Are there any spillover effects from expropriations on default risk? An expropriation might lead to worsening government borrowing terms if we assume that the government's reputation for foreign investors also affects the debt market. While an international panel analysis of sovereign risk premia goes beyond the scope of this article, Figure 3 provides a preliminary overview. We tested whether there is a significant correlation between the expropriation ratio and risk premia on government loans in 1981 for countries that expropriated at least once in the period considered. We first implemented the same cluster analysis as in Figure 1 and show the results for two clusters. Figure 3a depicts cluster 1, which includes countries with more frequent expropriation events. The relationship is negative, with a correlation coefficient of −0.28, even though the t-statistic is not significant, suggesting that at a certain level of expropriations' frequency, spreads do not increase. On the contrary, Figure 3b shows that for countries that did not expropriate very frequently, this relationship is positive (even if the correlation coefficient is not significant either).
Default risk and expropriation ratios, 1981.
Sources: See text. Spreads and expropriation ratios as percentages.
Figure 3 situates Mexico's case in a broader, international context. Mexico is included in cluster 1, even though its level of spread is situated in the lower half of the sample (both clusters considered). In this regard, and in line with previous findings, the country was considered safe as a sovereign borrower until 1981Footnote 25. Somewhat paradoxically, given its past records of expropriations, the penalty on the debt market from an additional expropriation might not have been as high as countries with fewer expropriation events (those in cluster 2).
As we show below, neither the press nor the markets seem to have anticipated Mexico's banks' expropriation. One might wonder how reputational costs were considered in the decision to default and to expropriate. As previous literature has shown, Mexico's government representatives intended to minimise the costs of the moratorium through the design of a strategy aimed at obtaining the support of the U.S. Treasury, the IMF and commercial banksFootnote 26. While the moratorium mainly affected the government's banking loans, the government decided not to interrupt payments on its bonds or on its trade-related credits. Regarding the expropriation, the government repeatedly insisted that it only affected domestic banks. This differentiated treatment (averting a negative effect on other sectors) may have been motivated by the relevance of foreign investment in the economy. Even then, as we shall see in the next section, we posit that the expropriation affected the country's reputation beyond the damage caused by the default.
5. Mexico's risk perception
In this section, we provide evidence showing that the decision to nationalise worsened the levels of country risk, as demonstrated by the sharp increase in the yields of a Mexican bond being quoted on the London Stock MarketFootnote 27. We complement the results with an overview from the international press to show that the nationalisation was unexpected and generated a negative perception. We then present archival evidence on the debt negotiation process that shows that the nationalisation interrupted and delayed an agreement to obtain an IMF programme and a debt rescheduling. This interruption was not reported in the press. We can only speculate on a counterfactual case in which the effects of the nationalisation on the negotiations were known and whether this would have had a stronger effect on risk premia.
5.1 Risk Assessment
During those years, rating agencies did not publish sovereign ratings (Gaillard Reference Gaillard2012; Altamura and Flores Zendejas Reference Altamura and Flores Zendejas2020). Nevertheless, certain publications disclosed relevant information on the economic and financial conditions of a large group of countries. Moody's annual reports on Mexico provided a description of the financial system and the bonds issued by the Mexican government. Its 1982 annual report disclosed the number of banks nationalised: forty-seven deposit banks, thirty multiservice banks, twenty-seven financial banks, three credit mortgage institutions and seven capitalisation credit banks.
Moody's (1983) report lists bonds quoting in different markets. This information is presented in Table 2. It displays the bonds listed at the end of 1982 and their outstanding amounts in early 1983. While most of these bonds were denominated in U.S. dollars, others included marks, yen, pounds, francs and Swiss francs. The maturities of these bonds were variable and, in some cases, could be extended. It is interesting to note that it was unclear whether these bonds would be excluded from the moratorium. Kraft (Reference Kraft1984) posits that there was considerable disagreement between European and U.S. banks regarding their treatment, as Europeans aimed to exclude them. As these bonds had different currency denominations and had been issued in different countries, it might have been more difficult to find a common ground for equal treatment in the event of a moratorium or a default.
Bonds reported in the Moody's International Manual, March 1983
Source: Moody's Investors Service 1983.
We use this information to analyse the yields of a long-term Mexican government bond issued in pound sterling. I measure country risk as the spread between the yield of a long-term government bond denominated in pound sterling and a similar bond issued by the U.K. governmentFootnote 28. This risk indicator shows how the new policies were perceived by the market. If investors and banks believed that nationalisation could have been beneficial for Mexico's debt capacity, we should observe a decrease in the yield premia. On the contrary, an increase in this variable could reflect a loss in confidence in the capacity of the government to honour its debts and, more generally, a deteriorated investors' perception of the country's protection of property rights and the rule of law. Bonds were secondary to bank loans' volume. Alvarez (Reference Alvarez2019) reports that around 81 per cent of the government's external debt was owed to commercial banks, while bonds were less than 5 per centFootnote 29. For this paper's purposes, it is interesting to note that the yields of such bonds allow us to assess the impact of Mexico's policies on country risk.
Figure 4 shows the daily evolution between July and the end of October. While the spread shows a slight increase since July, a first relevant upward movement can be observed around 8-10 August, the moment when Silva-Herzog began his communications with the U.S. government. In the first 2 days after the nationalisation announcement, the yield increased from 879 basis points to 947, an increase of approximately 8 per cent. While this value stabilised in the following weeks, by the end of the month it had climbed again to more than 1000 basis points. Clearly, the state of the negotiations and the economic policies implemented did not contribute to a decline in the risk perception of the government.
Yield spreads of a Mexican government bond in 1982 (pound sterling denominated).
Source: Own computation from the Financial Times.
A structural break test allows us to identify shocks that might have affected investors' risk perception. The risk premia series has a unit root for the sample (Table 3), permitting us to test for the existence of a structural break using the Zivot-Andrews and Lee-Strazicich LM tests (Table 4)Footnote 30. In accordance with the tests, we cannot reject the null hypothesis that the series has a unit root with a structural change in the trend for 9/03/1982 and 8/18/1982 and in the intercept for 8/18/1982 and 8/20/1982. The date for the structural breaks on 18 August corresponds to the first day trading after the news went public on the negotiations between Mexico's government and the U.S. governmentFootnote 31. The second break corresponds to the second day of the bank nationalisation. The structural changes identified correspond to increases in the spreads. Using a breakpoint regression (Bai and Perron Reference Bai and Perron2003), I estimated the difference in the parameters that arise from a structural change. Table 5 present the parameters associated with the trend and intercept for two key periods of the sample, showing an increase in both cases.
Unit root test table
Notes: H 0: The variable has a unit root. We reject the null hypothesis with a significance of 10 per cent (*); 5 per cent (**) and 1 per cent (***).
Crash and break tests
Note: H 0: $\exists$
unit root with structural change on the intercept, trend or both.
***indicates there is no statistical evidence to reject H 0 at 99 per cent confidence, **at 95 per cent and *at 90 per cent.
Note: In parentheses it is the critical value of the test. The Crash and Break at the Lee–Strazicich refer to the intercept and the trend, respectively; one and two refer to the number of structural breaks that the test allows.
Source: Own estimations.
Bai–Perron tests
Note: the P-value is presented in parentheses.
Source: Own estimations.
Table 5 shows that, while the results from the Bai-Perron test are significant for the first date, those for 3 September are not. Overall, the increase in the spread after the nationalisation is less pronounced than that observed as Mexico's debt repayment difficulties became known. This narrative suggests that the loss of the government's reputation in the debt market could have influenced Mexico's risk perception in other sectors. Moreover, the sharp increases in the spreads in August demonstrate that while the reputational costs of the moratorium announcement were high, the marginal costs of nationalisation were low. In this regard, these findings suggest that the timing of defaulting and expropriation was a rational decision from a reputational perspective.
5.2 Reactions in the Press
It has been argued that the international press regarded the announcement positively (Basáñez and Camp Reference Basáñez and Camp1984, p. 203; Elizondo Mayer-Serra Reference Elizondo Mayer-Serra2001, p. 179). Nevertheless, this characterisation is not entirely accurate. An overview of the press shows that the general view was one of uncertainty and surprise. I first used the Fativa Dow Jones database, an international news database produced by Dow Jones, a major global provider of economic and financial informationFootnote 32. I focused on all articles published in English between 2 September and 30 September 1982. My joint search on «Mexico» and «banks» released 266 entriesFootnote 33. From this figure, seventeen articles were published on 2 September, the day after the nationalisation. Ten articles were neutral or unrelated, five reported negative opinions and two reported positive opinions. However, one of these two articles, titled «Takeover pleases US Banks», recognised that banks had been shocked and that, in the long run, nationalisation could reduce confidence in the Mexican banking system.
Positive articles thereafter remained ambiguous regarding the final effects of the nationalisation. One example is «Mexico backs Banks’ Debts».Footnote 34 It reproduced a telex signed by Silva-Herzog, where the government announced that it would guarantee the debts of the banks that had been nationalised, something that remained unclear. In fact, from the total number of articles found in Factiva, the word «confidence» was repeated seventy-four times. It was mostly related with negative sentiments including «undermine», «decline», «lack» and «decrease» while I only found the words «bolster» and «confidence» three times.
While a proper text analysis goes beyond the scope of this article, the qualitative evidence suggests that market sentiment remained negative. An illustrative example can be found in an article published by the Canadian Globe and Mail newspaper that qualified the nationalisation as «an abrupt move that stunned economic analysts»Footnote 35. It claimed that the announcement would have a negative effect on foreign confidence in Mexico's ability to face its economic crisis. The same article quoted an interview with a U.S. business representative who predicted panic withdrawals from Mexican banks. The article mentioned that the move cast some doubt on the likelihood that the government would reach an agreement with the IMF, with which it was negotiating a 3-year $4 billion loan. It speculated on the kind of conditionality that the IMF was requesting, which included policies such as the reduction of public expenses through denationalisation and reduced restrictions on currency tradingFootnote 36.
Other articles emphasised the relevance of the event. The United Press International reported that the bank nationalisation was seen as a threatening catastrophe by the financial communityFootnote 37. The New York Times (NYT) compared the event to Mexico's expropriation of foreign oil companies in 1938. Even so, the NYT continued, central banks from ten Western nations had approved a $1.85 billion loan to the countryFootnote 38. The Financial Times reported that it was unclear whether Citibank would be affected by the nationalisation move. It quoted international bankers who predicted that the move would have only a minimal impact on the banks' operations, as the sector had always been tightly controlled by the central bank. It was also reported that the U.S. Treasury Secretary had not been notified in advance of Mexico's nationalisation plans. The article reported that the Mexican peso had depreciated in the New York foreign exchange marketFootnote 39. In a similar vein, The Associated Press reported that stock, bond and precious metals prices soared as investors worried about the stability of foreign governments and currencies sought «safe harbors for their money». It stated that there could be more nationalisations of banks in Latin or South AmericaFootnote 40.
Uncertainty also concerned the assets held by Mexican banks, as many of them were shareholders in several companies. I complemented my analysis with an overview of The Economist Historical Archives database and the October issue of The Euromoney Magazine, then the main magazine reporting on commercial banks' lending. The magazine Euromoney reported that the political party in power had always opposed the nationalisation of Mexican private banks, something that had been proposed by the Unified Socialist Mexican Party. Even so, the magazine reported that the measure had received high levels of popular support, despite the President's poor image as a «discredited politician who had brought his country to the verge of ruin»Footnote 41. The article indicated that the government planned to sell the companies owned by the nationalised banks. However, the article quoted a banker asking «Who will want to buy these companies? Who can say the government won't step in and nationalise them?» The Economist also reported that leftist political parties and trade unions had been delighted, but emphasised the uncertainty created by the President's speechFootnote 42.
5.3 Negotiations with the IMF
While Silva-Herzog had been having frequent contact with the IMF since early 1982, he asked the IMF to send a mission to Mexico that started on 23 July. On 13 August, he entered into formal negotiations to obtain an IMF loan (Kraft Reference Kraft1984, p. 10; Boughton Reference Boughton2000, p. 289). Before an agreement could be reached, the Mexican government needed to find the resources necessary to continue servicing its debt. As part of the emergency support received, there was a US$700 billion swap with the Federal Reserve, a US$1 billion advance payment for purchases of Mexican petroleum, and US$1 billion in loans from the Commodity Creditor Corporation. Finally, the BIS granted a US$1.5 billion credit line to Mexico's central bank. According to Anthony Salomon, President of the Federal Reserve Bank of New York, these loans would allow the government the necessary time to reach an agreement with creditor banks and the IMF for an extended arrangementFootnote 43.
The success of the negotiations of Mexico's government with the IMF was dependent upon the willingness of commercial banks to maintain their credits to Mexico during the period requested (90 days) and on the government's capacity to convince bankers that the measures to be undertaken would be sufficient to redress the economic crisis. The bankers had been informed about the IMF mission and the possibility of obtaining a 3-year Extended Fund Facility (EFF) programmeFootnote 44. At the end of August, the IMF Executive Directors waited to learn the position of the banks before deciding on the nature of the programme and the size of the loan, even though they remained sceptical about whether the conditions initially announced by the Mexican government would be met. A positive assessment was provided by the fact that commercial banks had initially reacted positively to the meeting with Silva-Herzog. Overall, optimism regarding the finding of an optimal solution was still in the minds of the IMF officialsFootnote 45.
Therefore, the announcement of Mexico's bank nationalisation came as a dampener to the negotiations. Silva-Herzog was uncertain about whether he would continue the negotiations, and the IMF decided to send a new mission after 20 September to evaluate the policies announced by the Mexican President. The IMF also became pessimistic about whether an agreement could have been reached before the new administration took office. It was not only that it had been difficult to include members of the new administration in the negotiations, but also that «changes in the direction of certain policies that followed announcements made by the President on September 1 obviously complicated the process»Footnote 46.
The announcement had an immediate impact on negotiations for the EFF programme. According to IMF documents, not only did the Director General of Mexico's central bank resign, but officials with whom the IMF had been negotiating «expressed shock and surprise about the measures announced by the President». The author of the memorandum also seemed to confirm that the President did not appear to accept any blame for what had happened. However, the breakdown of the negotiations was not supposed to be made public. Furthermore, the new Director General of the Bank of Mexico, Carlos Tello, apparently needed time to implement the new policies. IMF officials had been well aware that he had been hostile to the IMF in the past, and therefore, «may not have any interest in continuing the negotiations». It seemed nevertheless, that while the outgoing administration would not continue, the finance minister would push to reach an agreement if he remained in his postFootnote 47.
In a Memorandum on the annual meeting between the IMF and the World Bank in Toronto, Nigel Carter—then Personal Assistant to the Managing Director—described how Ted Beza (IMF Managing Director) recalled that Mexico's nationalisation and exchange controls took place while the Fund's mission was in Mexico. According to Carter, Beza forecasted that such measures would delay negotiations since the IMF needed to assess the impact of those measures and understand how they could affect the programme that the IMF was designing. He also outlined the programme, as discussed with Silva-Herzog, including the need for adjustmentFootnote 48.
Banks from different countries had been following Mexico's negotiations with the IMF and also reacted negatively to the nationalisation and to its potential effects. Nevertheless, in a few cases, banks felt less concerned about the crisis and the outcome of the negotiations. This was the case of the Swiss banks. As the Swiss National Banking Association (SNB) reported, it did not see the need to initiate an investigation, as foreign participation in the Mexican banking sector had been forbidden since 1932. At that time, only City Bank was allowed to stayFootnote 49. For the SNB, the only factor that needed to be monitored in Mexico was Swiss banks' exposure to Mexico's public debt. However, the report expressed some misgivings about the political and macroeconomic evolution of the country.
A very different case was that of the British banks. At the Bank of England (BoE), the Sovereign Risk Committee closely followed the position of Mexico's banks. It is interesting to note that British commercial banks did not necessarily share the views of their U.S. counterparts, which they considered as too optimistic. One of the reports of the same meeting in Toronto, a note addressed to Anthony Loehnis—then Executive Director of External Finance—and members of the «Mexican Task Force», reported that David Ardron (in charge of the Sovereign Risk Committee) said that «US banks seemed very relaxed» and maintained their existing levels of deposits with Mexican banks. However, the author of the report seemed to favour a more cautious attitudeFootnote 50. Some days later, the position of the BoE seems to have become more positive. In an unsigned Memorandum addressed to the BoE governors, the author praised the Mexicans for having successfully achieved their first and overriding objective, namely, to gain prompt and close control over their net external payments. The report then continued:
«Whatever misgivings may be felt about the nationalization of Mexican banks and the change of personnel at the top of the central bank, the whole situation would by now have been a lot worse if the Mexicans had simply allowed things to drift out of control, with a spiraling depreciation of the peso and growing internal disorder. The example they have in practice set is quite a good one»Footnote 51.
Regarding the interbank liabilities of the Mexican banks, nevertheless, the report stressed that «the Mexicans themselves did not fully appreciate the special nature of these liabilities, and their special importance for Mexico's future credit standing and for the credit standing of other major creditors in the international markets. However, they were soon made aware of this special importance and agreed to exclude these liabilities from the moratorium. Once again, the action was a correct response to a developing emergency»Footnote 52.
The report then stressed the different options ahead to avert major withdrawals of interbank deposits from Mexican banks—still an unsolved issue—to provide further liquidity to Mexico's central bank and make sure it was able to provide support to its banks. In other words, nationalisation did not seem to have offered any kind of solution—although exchange rate controls helped—but remained an international coordination challenge between creditor central banks, the IMF and the BIS. If anything, it increased the uncertainty of the outcome of the crisis.
6. Conclusions
In this paper, I have placed Mexico's debt crisis in a broader, international context. While the literature on the 1982 debt crisis has focused on sovereign debt problems of defaulting countries, my analysis has encompassed the role of expropriations. In the late 1970s and the early 1980s, countries prone to default were also those that had experienced an expropriation episode at least once during the same period. Countries that expropriated also had worse macroeconomic fundamentals, thereby increasing their likelihood of defaulting. In this regard, Mexico was not unique. Mexico's debt crisis and bank nationalisation corresponded to the government's reaction to an adverse macroeconomic context, as was the case in other countries. Mexico was particular to the extent that the government defaulted and expropriated within such a short time frame.
Second, I have shown that financial markets did not welcome the decision to nationalise. An overview of the international press, and the reactions of the bond market show that the decision was perceived as negative. My analysis of the risk premia on Mexico's government pound sterling bond shows that markets reacted negatively to nationalisation, a result that contradicts the argument on the supposedly positive assessment of the nationalisation on Mexico's debt situation. However, this negative reaction was modest compared to the risk premia's increases in the aftermath of the moratorium announcement. Therefore, our findings do not support the theoretical arguments of reputational spillover effects originated by an expropriation and affecting government bond prices. Further research could provide international evidence of the bilateral relationships between expropriation events and sovereign debt markets. These relationships require further analysis for the most recent years.
Finally, the Mexican government's attempts to obtain an IMF loan were affected by the expropriation, thereby delaying the agreement and increasing the uncertainties in the political management of the economy. The archival evidence of this article confirms Boughton's (Reference Boughton2000) narrative on the effects of the expropriation on those negotiations. Fortunately, the nationalisation did not fully affect the final outcome, which was largely dependent upon actions of other actors, including foreign central banks, foreign governments and international organisations, all of which were willing to avert a major international crisis. While foreign investment fell considerably in the years following the crisis, this rapid, multilateral and coordinated response, mitigated the effects of an expropriation on the government of Mexico's reputation, as would have been certainly the case in a pure market-driven framework.
Acknowledgements
I am particularly thankful to archivists at the Banco de México, at the Bank of England and at the International Monetary Fund. The author is grateful to the participants at the Business History Conference in Mexico City, 7-10 April 2022, where a preliminary version of this article was presented. Sebastian Alvarez kindly shared contemporary press articles with me. Research assistance by Raúl Antonio Tirado Cossío and Benjamin Elam Rodriguez Alcaraz was particularly helpful. Financial support from the Swiss National Science Foundation, grant 100011_192214 is gratefully acknowledged. The usual disclaimer applies.
Archival Resources
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