Memories of the Meltdown: The Sky Is Falling on Mexico Too

Fury at the billionaire bailout of the criminal class that has driven Wall Street into a disaster of 9/11 dimensions festers down at the bottom of the economic food chain on Main Street, USA. It is a familiar syndrome south of the border. Bailing out the super rich on the backs of the rest of us has had Mexicans seething since the great FOBAPROA scam of the mid-1990s.

The Mexican Meltdown kicked in in late 1994. The outgoing president, the reviled Carlos Salinas de Gortari, had borrowed $33 billion USD in short-term loans to keep his house of cards from crashing down before he left office. Worried about his legacy, Salinas refused to devaluate a chronically over-valued peso, leaving the dirty work to his inept successor Ernesto Zedillo. When on December 20, the new president was forced to devalue, the peso sank from three to ten to a dollar overnight. Panicked investors pulled their money out of the country to the tune of $1.5 billion a day. Capital flight emptied out the nation's once-healthy reserves. With payback on Salinas's short-term "tesobonos" coming due daily, Mexico was staring down default by January 1995.

Meanwhile, Mexican banks, which were re-privatized just two years previous, had been stripped back to the bone. The only liquidity left in the vaults was said to be $26 billion in narco-money that the U.S. Drug Enforcement Administration claims is washed through the Mexican banking system annually. Interest rates were ratcheted up to 100% plus and debtors were crucified.

Encouraged by the banks, farmers had borrowed beyond their means to position themselves for the never-materialized bonanza of the North American Free Trade Agreement (TLCAN are its Spanish initials) and couldn't pay up. The banks foreclosed on family farms, ranches, machinery, and herds of livestock.

Urban borrowers, squeezed by the soaring rates, lost taxis and taco stands, their furniture and their apartments. The banks hired armed, off-duty cops who broke down the doors of the debtors, terrorizing their families. Over a thousand citizens were unlawfully jailed and charged with theft.

By February 1995, Mexico had lurched into its deepest economic slide since the Great Depression. Indeed, depression was the mood of the day. Farmers drank pesticide to end it all or poured gasoline over their bodies and immolated themselves in despair. Thirty-three citizens leaped to their deaths before onrushing trains down in the Mexico City Metro in 1996, a record.

But other debtors organized and fought back. El Barzón, which took its name from a popular depression-era, tune (the "barzón" was the strap that fastened the plough to the mule team) mobilized farmers and city slickers alike. Bank officials were tarred and feathered, highway tollbooths burnt to the ground. In Mexico City, the Barzonistas sealed bank doors shut with superglue and marched through the streets in their underwear or less or clothed only in barrels in classic Great Depression style. One day, El Barzón paraded a circus the banks had foreclosed on to the great doors of the Bank of Mexico where the elephants took dumps on the marble steps, a steaming souvenir for the hated bankers.

The U.S. Central Intelligence Agency told the daily business journal El Financiero that the Barzón movement was even more subversive than the Zapatista Army of National Liberation, the Indian rebels in Chiapas whom Zedillo was falsely blaming for destabilizing Mexico and triggering the collapse.

Like the Cassandras of Wall Street today, the bankers cried Armageddon and the president, Zedillo, much as George Bush in the current imbroglio, stampeded congress into a monumental bailout. FOBAPROA ("Banking Fund for the Protection of Savings") dumped $120 billion USD in bad debt on the backs of Mexican taxpayers, 20% of the nation's gross domestic product - Bush's monstrous bailout only accounts for 7% of U.S. GDP.

Unlike the U.S. Congress's testy reaction to what is being dubbed "GRINGOPROA" here, the Mexican legislature, then dominated by the long-ruling (71 years) Institutional Revolutionary Party (PRI), in connivance with the right-wing PAN, signed off on FOBAPROA without missing a beat. Only the left Party of the Democratic Revolution (PRD), led by Andres Manuel Lopez Obrador (AMLO) raised its voice in protest. A referendum on the bailout organized by Lopez Obrador drummed up 2,000,000 votes against Zedillo's scam.

The cost of FOBAPROA has been incalculable. With the Mexican government obligated to shell out $8 to 10 billion USD of Mexican taxpayers hard-earned money each year to pay off the debts of deadbeat banks, social budgets have shrunk, schools and hospitals do not get built, and the nation's highway system, also privatized under Salinas and Zedillo, has fallen into dangerous disrepair.

Once the banks had been reasonably sanitized, the Zedillo government sold them off to international financial combines - Citigroup, Santander, the Bank of Nova Scotia, the Spanish BBVA, and the Hong Kong-based HSBC dominate the Mexican banking industry, 90% of which is in non-Mexican hands. Now the globalization of the Mexican banking system has left it vulnerable to contagion from the collapse of Wall Street.

In fact, the gringo credit crunch has already spread south of the border. Battered by spiraling interest rates, Mexican borrowers are defaulting big time on their loans - 6.9% of all bank loans are unrecoverable. Spurred by unconscionable handouts of credit cards to the middle and underclasses, 8.9% of all plastic is contaminating credit markets. Constricting credit threatens 2,000,000 small businesses and doomsayers speculate that fresh crisis and a new FOBAPROA are on Mexico's plate for 2009.

The U.S. debacle, tagged the "Jazz Effect" by Argentinean president Cristina Fernández at the United Nations General Assembly conclave last week (an insult to a uniquely American art form), has infected Mexico's economic bloodstream and the nation's well-being seems beyond recovery for the foreseeable future.

Whereas President Felipe Calderón and his 350-pound finance minister Agustín Carstens once assured suspicious investors of 3% growth in 2008, the lowest on the Latin American totem pole trailing even basket-case countries like Honduras and Haiti, Merrill Lynch, itself a flattened former powerhouse just spun off to the Bank of America, has recalibrated that anemic forecast to a sickly 1.9% in light of the fall-out from the downturn in El Norte.

Sinking oil prices as energy demand tails off into a deflationary spiral will cripple investment in PEMEX, the national oil consortium Calderón so ardently wants to sell off to Big Oil - PEMEX accounts for 40% of the nation's budget. Even more ominous is the nosedive in "remesas," remittances sent south by Mexican workers in the U.S., that is the only sustenance for whole rural regions and which constitute Mexico's poverty program - one out of every four Mexican families now subsist on the remesas. Remittances are Mexico's second source of dollars, right behind petroleum.

This August, the flow of greenbacks from the north diminished by a shocking 12% and total remesas have sunk 4.4% in the first five months of 2008. Prospects for relief are dim. Mexicans working in the U.S. are the last hired and the first fired. With U.S. national unemployment topping 6% - California where more Mexicans work than any other state registered 7.9% unemployment last month and the construction industry which employs many Mexican workers is off 14% - workers are beginning to return home even though unemployment and inflation here are hitting highs not seen since the Meltdown of the 1990s.

Although the Calderón administration plays down the return migration, estimating that no more than 200,000 workers will come home to Mexico in coming months, many immigration watchers are calculating that the numbers could stretch into the millions. Despite labor secretary Javier Lozano's happy face forecast that Mexico will be able to provide jobs for the returnees, it should be remembered that these workers fled to the U.S. precisely because they could not find work here.

Moreover, Mexico, which runs a serious trade deficit with the U.S., will see exports and the jobs they generate dry up in 2009. Automobile and auto parts orders, a big chunk of Mexico's export basket, have been cancelled due to sagging sales up north and workers are being laid off on both sides of the border. Manufacturing orders for border-based maquiladoras are plummeting and hundreds of thousands of jobs have been lost to even lower wage countries like China in recent years.

The news gets worse. Workers' pension funds, privatized under Zedillo to allow for investment in money markets, have lost 62.5 billion pesos since the first of the year. The credit collapse has gutted the Mexican stock market as sorely as it has eviscerated U.S., European, and Asian exchanges - the Bolsa de Valores has lost over a thousand points just in the last month, panicking the nation's top Forbes list billionaires.

Carlos Slim, the world's first, second, third, or fourth richest man depending on how one measures fortunes, claims to have lost half of his in recent weeks - Slim, owner of many telephone companies in Latin America, is heavily invested in both Wall Street and the Mexican stock market where his corporations account for a third of the trading volume. The despondent Slim recently summoned the press to hear out his doom and gloom prognosis, describing the current credit crisis as far more dangerous than 1929 and anticipating deep and prolonged world recession if not Great Depression.

While the sky falls in on Mexico's future, President Felipe Calderón appears astoundingly blasé, echoing John McCain's misguided appraisal of his own economy by declaring Mexico's "fundamentally sound," an opinion he shared with brokers last week at the reeling New York Stock Exchange, where he was invited to open trading by clanging the traditional bell.

Calderón's optimism was echoed by his super-sized finance minister Carstens who assures investors that "this is one crisis Mexico is prepared for." The old maxim that when Wall Street gets the sniffles, Mexico comes down with pneumonia is no longer operative, the former World Bank behemoth counsels. "Now Wall Street has pneumonia and we will only get a little cough." Such delusional reasoning invoked a chorus of coughing when Carstens went before congress recently to insist that Mexico would resist the gringo disease without resorting to cutting budgets.

Dubious observers like La Jornada financial columnist Carlos Fernández Vega suggests that a good place to initiate cuts might be Carstens himself. Imagine how much Mexico could save in spiraling food costs if the corpulent finance secretary's intake was slashed 10% in the next budget cycle.