Tossing A Lifeline To Mexico's Biggest Banks
Mexico's yearlong economic crisis has been murder on the country's banking system. The government has been forced to take over six banks and bail out nine others. But the prevailing wisdom was always that the system's crown jewels, Banamex and Bancomer, would easily weather the storm. Now they, too, are in sufficient distress that the government is preparing to assume chunks of their troubled loan portfolios--and those of two other banks. The cost: More than $4 billion on top of the $11 billion the government has already spent on bailouts. The government effort has already grown so massive that some critics are saying that the banks are being renationalized.
It's a stunning reversal. Just four years ago, the government made $13.5 billion selling off the state-controlled banks to some of Mexico's cockiest entrepreneurs. They plunked down an average of three times book value for 18 banks, figuring that the economic reforms of then President Carlos Salinas de Gortari, coupled with free trade with the U.S., would guarantee vigorous economic growth and handsome profits.
SICK SYSTEM. Instead, the new owners have seen the value of their holdings devastated by the high interest rates and bad loans that are the hallmarks of the financial crisis. With borrowers unable to pay, past-due loans now exceed $17 billion--18% of the system's portfolio. If tougher U.S. accounting standards were applied, the figure would be as high as 35%--meaning the system is very sick. One big loser is financier Agustin Legoretta III, whose investor group has lost nearly all the $1.4 billion it paid for Grupo Financiero Inverlat--now a ward of the state.
The banks' problems present a big threat to President Ernesto Zedillo Ponce de Leon's pledges that the economy will recover in 1996. The country needs healthy banks to finance any recovery. Yet, Standard & Poor's Corp. says Mexican banks won't start to turn around until the third quarter of 1996 because banks and borrowers are still being hit by 50% interest rates.
The worry is that Mexico's banking problems will be a drag on the economy for years. Moody's Investors Service warns that the bank bailout could cost 10% to 15% of GDP, or up to $40 billion. That would slow growth and suck Mexican and international funding away from other uses. With many economists expecting the economy to shrink in early 1996, the government may have to step in with more money soon. "The government is providing Band-Aids to the banks as they come for help, but the real cancer--the past-due loans--has not been eliminated," says economist Rogelio Ramirez de la O.
The government doesn't have any easy way out of this mess. Confidence in Mexico is so low that if the government tries to help the banks by bringing rates down, the markets will likely pummel the peso and Mexican securities. That's what happened last fall when market jitters forced an upward spike in rates, producing a flurry of new defaults.
WARY INVESTORS. In October, Standard & Poor's downgraded Banamex' peso debt to BBB-, S&P's lowest investment-grade rating. In response, the loan-buyout program, previously used to help smaller banks, was extended to Banamex and Bancomer, which together control 39% of the system's assets. "Banamex and Bancomer are the most important banks in Mexico, and we simply can't run the risk that their finances might deteriorate," says Eduardo Fernandez, president of Mexico's Banking & Securities Commission.
The banks' troubles present a buying opportunity for foreign banks--though most are wary of getting entangled in a Mexican bank now. But Spain's Banco Bilbao Vizcaya paid $340 million to buy control of troubled Mercantil Probursa in July. Canada's Bank of Nova Scotia is negotiating to assume control of Inverlat. And Bancomer is shopping around for a foreign minority investor to inject fresh capital.
As they grapple with the banks' problems, Mexican officials now concede that they mishandled the bank sell-off in the early 1990s. Too much emphasis was placed on obtaining high prices and too little emphasis on the banking skills of the buyers. "In retrospect, I would have applied some of the purchase price to better capitalization of the banks," says Finance Secretary Guillermo Ortiz, who was in charge of the privatization program then and is responsible for bailing the banks out now. He is probably doomed to spend a long time correcting his mistake.