Mexico: Could This Scandal Sink The Pri?

It took investigators six months of painstaking work to confirm the Mexican Congress' suspicions: A nine-year effort to shore up the country's tottering banking system has been a disaster. In a 300-page report delivered on July 19, Canadian auditor Michael Mackey said lax government regulation allowed rogue bank owners to lend $8 billion to themselves and cronies without collateral. Worse, regulators spent $71 billion on a haphazard cleanup that still leaves banks undercapitalized and unable to lend.

These and other revelations could pose a serious problem to President Ernesto Zedillo's Institutional Revolutionary Party (PRI), just as campaigning for the July 2000 presidential election begins. For the first time since the PRI assumed power 70 years ago, it faces the real possibility of losing the election to one of two fast-growing opposition parties, the center-right National Action Party (PAN) or the left-leaning Party of the Democratic Revolution (PRD).

The opposition, which has controlled Congress since 1997, has made the bank bailout audit its first major challenge to the PRI-controlled executive branch. While the audit contains no evidence of blatant government wrongdoing, it lays bare the loose regulation and generous bailout packages that forced taxpayers to absorb billions in dubious bank loans. And it gives PRI opponents ammunition: Mackey revealed that regulators refused him access to records from failed Banco Union, the alleged pipeline for $25 million in contributions to the PRI for Zedillo's 1994 campaign.

The government pledges to punish any wrongdoing. It also argues that it had to bail out the banks to protect the savings of ordinary Mexicans. But in fact, just a few hundred wealthy Mexicans account for a large chunk of bank deposits. These millionaires, and a dozen or so large businesses whose past-due loans formed the bulk of the debt absorbed by the Treasury, appear to be the chief beneficiaries of the bailout. If opposition politicians get that message across to voters, they may score big in next year's elections. "The audit shows a clear pattern of complicity between authorities and some bankers and businessmen," says leading PAN congressman Santiago Creel.

EMBARRASSED. There's certainly dirt to publicize. Three Mexican financiers are awaiting trial on fraud charges. One, Carlos Cabal Peniche, is fighting extradition from Australia, claiming he faces political persecution in Mexico because his Banco Union allegedly contributed millions to the PRI. Before fleeing, Cabal Peniche owned two banks, and he may have illegally lent himself as much as $500 million to buy control of Fresh Del Monte Produce in 1993.

The banking crisis is an embarrassment for the PRI technocrats who have run the economy since the mid-1980s. The PRI's current leadership, including technocrat-in-chief Zedillo, argue that Mexico weathered recent international financial crises because they insisted on strict fiscal discipline at home. But party traditionalists fear they could lose next year's election if voters conclude the technocrats bailed out the fat cats while squeezing common Mexicans with spending cuts. Debate within the PRI over the bank bailout and an investigation into the fugitive banker's alleged donations to the Zedillo campaign could shatter party unity before the party's Nov. 7 primary. "We must get to the bottom of this problem so that our party is not affected", says PRI presidential hopeful Roberto Madrazo, who openly criticizes the technocrats' performance. Meanwhile, the opposition is standing by, ready to exploit any misstep by the PRI.

Before it's here, it's on the Bloomberg Terminal.