European nations, struggling to end their sovereign debt crisis, should look for guidance from Group of 20 president Mexico’s swift action to resolve its own financial troubles in the 1990s, officials here said.
“While Europe took years to make decisions, we made decisions with the U.S. and the International Monetary Fund in two months,” Luis Tellez, chief executive officer of Bolsa Mexicana de Valores SAB, the nation’s stock exchange, said in an interview on the sidelines of meetings with Group of 20 finance officials today in Mexico City.
Latin America’s second-biggest economy shrank 6.2 percent in 1995, when the government used a $50 billion IMF bailout to avoid default after floating the peso against the dollar. The December 1994 devaluation ignited inflation that peaked at 52 percent and sparked capital outflows across the region in what became known as the Tequila Crisis. Tellez was chief of staff at the time to then-President Ernesto Zedillo.
From that experience, part of a string of boom to bust cycles in Latin America dating back to the 1970s, policy makers from Brazil to Mexico enacted tight spending limits that remain in force today.
In contrast, European nations are still trying to halt contagion more than two years after the debt crisis emerged in Greece. While Greece yesterday formally asked investors to exchange their government debt holdings for new securities in the biggest sovereign restructuring in history, economists from Citigroup Inc. to Commerzbank AG say Greece may still default amid a fifth year of recession.
Angel Gurria, Secretary General of the Paris-based Organization for Economic Co-Operation and Development, joked that the debate in Mexico’s Congress last year was over whether to approve a deficit equal to 0.2 percent of gross domestic product or 0.5 percent.
“Well, we have some of the largest countries in the world whose deficit is still up to double digits,” Gurria, a former Mexican finance minister, said at a press conference yesterday at the G-20 meetings.
Greece lacks advantages Mexico had in stemming its decline, Tellez said. Greece is part of the 17-nation euro zone; the peso’s 50 percent devaluation in 1995 made Mexico’s exports more competitive. Greece’s debt ballooned last year to about 160 percent of gross domestic product, while Mexico began its fiscal tightening prior to the crisis. A strong U.S. economy also helped drive Mexican growth of 5.5 percent in 1996.
Mexico sends 80 percent of its exports to the U.S. and its growth is tightly linked to that of its northern neighbor.
Mexican central bank Governor Agustin Carstens, a former IMF Deputy Managing Director, said Latin America learned tough lessons from successive debt crises dating back to the 1970s that are now applicable to Europe.
“First, during financial crises, expectations must be stabilized as soon as possible,” said Carstens, who worked in the central bank’s economic research department during the Tequila crisis. Then, when tensions ease, nations must be “focused on creating institutional arrangements capable of preventing and avoiding the reemergence of those crises.”
In the case of Mexico, those arrangements include a law that caps deficit spending.
Brazil, after it devalued its currency in 1999, enacted an even tougher fiscal responsibility law that put a ceiling on borrowing at all levels of government and threatened public officials with jail sentences if they don’t meet strict spending limits. As a result, the country’s debt fell to 36.5 percent of gross domestic product today, compared with 63 percent in 2002.
Chile, the world’s largest copper producer and the region’s highest-rated borrower, enacted laws requiring it to boost savings during periods of fast growth.
The European Union’s 130-billion euro debt bailout, approved this week, will probably fail because it is “fundamentally poorly designed and poorly implemented,” said Guillermo Ortiz, chairman of Grupo Financiero Banorte SAB and Carstens’ predecessor at Banco de Mexico.
“The program is a brutal intrusion,” said Ortiz, who was Mexico’s Finance Minister during the Tequila crisis. “There’s no light at the end of the tunnel.”