A Freeze Play at the Banks

By Charles Alexander

The Mexican government nationalizes its faltering financial system

Wearing the green, red and white sash that symbolizes Mexico's highest office, a somber President Jose Lopez Portillo took the podium in the Chamber of Deputies of the Mexican Congress last week to give his final state of the union address before retiring in December. Few political leaders have ever had to deliver a valedictory under such grim and humbling circumstances. Mexico's economy is staggering in a profound crisis that threatens the country's political and social stability. Inflation is running at 60%. More than half the population is unemployed or working at marginal, unskilled jobs like selling tortillas on street corners. The value of the peso against the dollar has fallen by 80% since the beginning of the year. Teetering on the edge of national bankruptcy, Mexico can no longer meet the payments on its enormous $80 billion foreign debt, the largest of any developing nation, without new emergency loans. The U.S. has become deeply concerned out of fear that Mexico's turmoil could damage the American economy.

As millions of Mexicans watched on television, Lopez Portillo spoke for nearly four hours in a booming voice that faltered only near the end. "We face great dangers now," he admitted. Down-playing his own responsibility, he argued that the economic troubles had been triggered by an unforeseen decline in world petroleum demand, which cut deeply into Mexico's revenues from oil exports. Then, in a vehement attack on Mexico's financial establishment, the President charged that the country's problems had been intensified by businesses and speculators who had invested their money outside the country. Said he: "A group of Mexicans, supported by the private banks, have taken more money out of Mexico in the past two years than imperialists ever exploited during the entire history of our country." Mexicans, he declared, now have at least $14 billion in foreign bank accounts, mostly in the U.S., and $30 billion in American real estate.

Amid a crescendo of applause from supporters, Lopez Portillo announced that his government was nationalizing all Mexican banks and imposing strict currency controls to stop the flight of capital from the country. "It is now or never," he said. "They [the speculators] have already plundered us. But Mexico is not finished. They will never plunder us again."

The reaction to Lopez Portillo's bold plan was sharply divided. Bankers and some businessmen were outraged. Said Carlos Abedrop Davila, president of the Association of Bankers of Mexico: "Nationalization of private banking will aggravate the current crisis." The government's top banker, Miguel Mancera Aguayo, director of the Bank of Mexico, promptly resigned, apparently in protest over the nationalization. Labor unions and left-wing political groups, however, praised Lopez Portillo. "We believe that these measures will strengthen the economy," said Jose Dorantes Segovia, president of the Labor Congress.

Lopez Portillo's drastic program is designed to help ease Mexico's severe shortage of U.S. dollars, the main currency of international trade. In recent months, Mexico has not earned enough dollars from its exports to pay for imports and keep up with interest on its foreign debt. That imbalance has helped drive down the value of the peso against the dollar. In the meantime, wealthy Mexicans, fearful that drastic moves like last week's nationalizations might soon take place, have been making the problem worse by sending money to foreign banks.

By controlling the banking system, the Mexican government hopes to slow the currency outflow. Under regulations now in force, most dollars in Mexican bank accounts, a total of about $12 billion, will be frozen and not allowed to leave the country. People who withdraw their money must accept it in pesos.

Many Mexicans doubt that the exchange controls will work. They foresee the growth of a vast underground network for illegal trading in dollars. Says Ricardo Pascoe, a spokesman for the Revolutionary Workers Party: "My feeling is that it's nearly impossible to control the black market." American experts on Mexico share that skepticism. Says William Cline, a senior fellow at the Institute for International Economics in Washington: "Exchange controls are troubling. As a general rule, they don't work very well, and in the special case of Mexico, they'll be even tougher to enforce because of that country's long border with the U.S."

The seizure of banks by the Mexican government may also be ineffective or counterproductive. After French President Franc,ois Mitterrand nationalized his country's banks in February, many edgy foreigners pulled bank deposits out of France, and that helped push the franc to record lows. Bruce Bagley, an associate director of the Johns Hopkins School of Advanced International Studies, thinks investors will be even more hesitant to keep money in Mexico's nationalized banks because of the government's reputation for corruption.

Both within and without Mexico, there is wide agreement that Lopez Portillo is attacking the symptoms of his country's disease rather than the root causes, for which many assign him the blame. After taking office in 1976, Lopez Portillo launched an overly ambitious industrial expansion program and lavished money on an effort to transform the country into a Third World power. He provided cheap oil and other aid to Central American neighbors. Riddled with corruption, his government has a payroll loaded with jobs that do not really exist. Lopez Portillo's extravagance unleashed Mexico's virulent inflation.

Three weeks ago the Mexican government rocked the international financial community by declaring that it could no longer afford to make payments on its $80 billion debt.

Knowing that a Mexican default could destabilize the entire global monetary system, the central banks of the leading industrial countries last week announced a new short-term loan of $1.85 billion. Continued unease about Mexico's finances and a rumor that Argentina is also close to default helped send the price of gold in London up $50 in two days last week, to $455 per oz.

Mexico has asked for a $4.1 billion loan from the International Monetary Fund, but the aid is likely to be granted only if the country adopts new austerity measures to improve its balance of payments. Such moves might include higher taxes and a sharp cutback in government spending. While helping Mexico's credit rating, these steps would also boost unemployment. Lopez Portillo gave no specifics of a new austerity program in his speech. Making unpleasant economic choices will soon be the job of his hand-picked successor, Miguel de la Madrid Hurtado, who will take office in December.

The U.S. has much to fear if De la Madrid fails to revive Mexico's financial fortunes. Economic chaos in a country that has a 2,000-mile-long open border with the U.S. would inevitably cause problems for the American economy. Warns Rimmer de Vries, chief international economist of Morgan Guaranty Trust Co.: "Mexico and the U.S. are so thoroughly integrated that we have to consider it financially a part of the U.S."

American banks hold almost a third of Mexico's foreign debt. Should Mexico go into default, several institutions would be hard hit, including Citibank and Bank of America, which each loaned the Mexicans as much as $2.5 billion.

Shock waves from the Mexican economic slump have already jolted dozens of American border towns from the Gulf of Mexico to Southern California. Merchants in these communities have long depended for much of their business on Mexicans coming across the border to shop. Now the value of the peso has dropped so low that Mexican purchasing power has dried up.

At the T.C. Worthy grocery store in Calexico, Calif., business has plunged 40% in the past month. Complains Store Manager Gaston Lopez: "We used to be busy all day. The four registers never stopped ringing. But I've had to lay off two cashiers, and the other two are working 40-hour weeks instead of 50." Says Wilfred Madrid, a department store owner in El Paso: "My business is off 80%. It's dead out there in the streets, and it's like a morgue here in the store." Last week the U.S. Small Business Administration set up a $200 million loan program for merchants devastated by the falling peso.

The American Government has also moved decisively to aid Mexico. The U.S. Commodity Credit Corp. is guaranteeing $1 billion in private bank loans for Mexican companies to buy American agricultural products. In addition, the Reagan Administration has agreed to give Mexico an advance payment of $1 billion on future oil deliveries for the U.S. strategic petroleum reserve. The hope is that this cash transfusion will help give Mexico enough time to turn things around. Washington realizes all too well that a Mexican economic collapse would be too close to home for comfort. --By Charles Alexander. Reported by Jay Branegan/Washington and Laura Lopez/Mexico City

With reporting by Jay Branegan, Laura Loacute;pez

This file is automatically generated by a robot program, so viewer discretion is required.