Banking System Remains Mexico’s Achilles’ Heel

Analysts may have welcomed Mexico’s multibillion-dollar program to prevent another election-year economic crisis, but they still see several caution lights flashing--including the virtual bankruptcy of the country’s third-largest bank.

The main economic threat facing Mexico in 2000 and beyond, according to a range of analysts, remains the sickly banking system, choking in bad debt and short of capital despite a huge bailout program. That means that not only are banks themselves weak, but also credit for corporate and individual loans is scarce and expensive.

Moody’s Investors Service said in a report issued Monday that Mexican banks need $13.41 billion in new capital to function successfully on a sustained basis--and few investors are rushing forward. The capital shortage is why “the average bank financial strength for Mexican banks has been near the bottom of the Latin American banking systems,” wrote Moody’s Vice President Philip J. Guarco.

Indeed, even as Mexico’s healthy economy outpaces the rest of Latin America, private-sector lending by its commercial banks fell 15.1% in real terms in the 12 months ended in May, the Central Bank said Monday.

The government last week announced a “program of financial armor” designed to prevent the kind of financial turmoil in 2000 that has marked the end of every six-year presidential term since 1976. That program includes $16.9 billion in international loans to reschedule foreign debt repayments until well beyond 2000, as well as a $6.8-billion line of credit.

Economists applaud that package as an example of the forward-looking, preventive approach President Clinton has called for to avoid renewed Third World financial turmoil. But they worry that the banking system’s problems remain an economic Achilles’ heel.

“The government’s refinancing package is very useful to avoid the end-of-term problem. The question is whether it is enough. And the answer lies in the whole banking system. You have to address that whole issue to really armor the Mexican economy,” said Ruben Ojeda, managing director of the Center for Private Sector Economic Studies.

Election-year crises and banking woes have been linked in the past. Mexico nationalized its banks in 1982 amid an earlier crisis. And the 1994 peso devaluation set off inflation and spiked interest rates, crippling the banking sector again and forcing the government to mount the mid-1990s rescue program that continues today.

A stark display of the banking system’s continued weakness emerged this month when trading was suspended in shares of Serfin Bank, the nation’s third-largest financial institution. Government officials last week confirmed that they would most likely take over Serfin, recapitalize it and sell it at a total cost to taxpayers of somewhere between $1.4 billion and $7 billion.

This would be the first bank restructuring carried out since the 4-year-old bank bailout program, which already has cost $65 billion, was revamped in December. Another potential bailout target, banking authorities say, is Bancrecer bank, which faces similar capital and bad-debt problems.

Financing problems also hamstring a number of major Mexican corporations. The huge Altos Hornos de Mexico steel company, employing 17,000 in northern Mexico, sought bankruptcy protection in the face of heavy debt payments this month as global steel prices continue to fall.

To be sure, most analysts agree that Mexico has done the right things and done them well over the last four years, and is far better prepared to withstand election-year uncertainties than ever before. But they call for urgent action on additional reforms rather than complaisance.

Mauricio Gonzalez, chief economist for the respected Grupo Economistas y Asociados, said political uncertainties always raise concerns during election years.

In this climate, “there is a lack of a government strategy, or at least lack of completing the strategy,” to deal with the banking system’s heavy bad loans portfolio, he said.

“The government has attacked one very important front, the public external debt,” Gonzalez said, “but the other, the banking sector, still needs major pieces put in place to complete the financial armor.”

The government acknowledges the need for further financial reforms, and several bills are pending in Congress that would tighten banking system controls. Marco Provencio, the chief economic spokesman, said the government is pressing hard for Congress to adopt additional measures to build on the revised bank bailout system adopted in December.

The pending reforms, awaiting action in the current special congressional session, include a new national banking commission that would revamp methods of banking supervision and a law that would require more guarantees from borrowers.

Furthermore, the government will submit legislation this fall to overhaul bankruptcy laws to make it harder for debtors to escape past commitments, Provencio said.

A main element of the legal changes adopted in December is to phase out the government’s blanket insurance of all bank deposits. By 2005, the deposit insurance will be limited to about $100,000 per depositor, as in the United States. That will increase pressure on banks to perform.

But the Moody’s report suggests the scale of the problem: “In effect,” Guarco wrote, “the Mexican banking system remains overwhelmed by the legacy of the 1994-95 banking crisis, in spite of the [bailout] program and numerous other capital injections from both domestic and foreign sources.”