The Mexican Bank Crisis Just Won't Go Away
When Mexican authorities announced a new debtor relief program last December, they promised it was the end of a four-year banking crisis. To make their point, they called the plan "punto final," Spanish for "full stop" or "period." Now, Mexicans joke that a better name for the plan would have been "comma."
Mexico's banking crisis just won't go away. Already the rescue has cost the government at least $65 billion. Now banking authorities are preparing to take control of Grupo Financiero Serfin, which controls the country's third- largest bank. Banca Serfin needs $1.4 billion in fresh capital just to stay afloat. The bank's shareholders, who have invested a total of $1.6 billion, are expected to bow out at a July 8 shareholders' meeting, losing everything. Then the government will come in, clean up the bank, and auction it off. A new government bank deposit protection agency, known as IPAB, or the Bank Savings Protection Institute, moved in recently as Serfin's losses mounted.
SAGGING. The Serfin disaster is just one of a series of bank bailouts that Mexico faces this year. Indeed, the banking system will see a new wave of consolidation as stronger banks buy up weaker ones and search for new investors. "Over the next 12 months we're going to see a massive rearrangement of the competition," says Phillip J. Guarco, senior Mexico bank analyst at Moody's Investors Service in New York. Mexico's 11 large retail banks could shrink to five or six by 2001, analysts predict.
Mexican banks are sagging under past-due loans that began accumulating after the December, 1994, peso devaluation. Since 1995, the government has been subsidizing debtors, buying up bad loans, and readying bankrupt banks for sale, often to foreign banks. But the problem loans persist because Mexico's economic growth has been uneven, and the legal framework means there's little cost to debtors if they default. After Serfin, Mexican regulators must still restructure and sell three other bankrupt banks. Congress has allotted them $12 billion to do it. But just one of those banks, Bancrecer, will cost some $8 billion alone, say regulators.
The costs keep mounting. Although Mexico's banking system reports an internationally respectable ratio of 8.4% capital to assets, ratings agencies argue that much of what the banks count as capital doesn't pass muster under international standards. So in addition to new billions to fix the worst cases, banks that pass for healthy need capital, too--some $13 billion, estimates Moody's Guarco.
Mexico's banks need to get back on track if the economy is to continue growing. Local banks haven't lent since interest rates spiked to 100% after the 1994 devaluation, forcing many borrowers to default. Although Mexico has posted solid growth since 1996, only top companies and exporters with access to dollar loans have fueled the economy. Without credit for smaller companies to expand and families to start buying cars and homes again, Mexico's growth, expected to reach 3% this year, could slow to a crawl next year.
Even Mexico's healthiest banks aren't lending because consumers are afraid to take out loans at annual interest rates of 35% that will jump at the first sign of economic instability. Credit to the private sector fell 15% in May compared with May, 1998, as the Asian and Russian crises and the devaluation of Brazil's real kept interest rates high. "The volatility in the markets over the last five years makes it very risky for a lot of people to take on credit," says Ricardo Guajardo Touche, CEO of Grupo Financiero Bancomer, which controls Mexico's second largest bank.
But the problem is not just reluctant borrowers. Banks can't lend because they're woefully short of capital. Bancomer's Guajardo says his bank needs $500 million to $700 million to strengthen the balance sheet and expects the money to come from asset sales or new shareholders. Publicly, Mexican officials say they're confident the bankers will come up with the cash without going back to the public till. "Serfin will be the last bank to use public funds," pledges Vicente Corta, executive secretary of the new bank deposit agency.
The latest shakeup comes at a delicate time. With Presidential elections coming in July, 2000, none of the political parties seems willing to pass tough legislation that would make it easier for banks to collect on bad debts and take over the assets of bankrupt companies. That's just one of the reasons it may be as long as five years before Mexico's bank system regains strength. Needy borrowers will just have to wait.