Mexico & Nafta - 19 August 2003

The country's commercial banks are bracing themselves for a US$5bn bill from the government over the controversial bank rescue in 1994 and 1995. The government, led by a former central banker, President Ernesto Zedillo, decided, without congressional approval, to rescue the banking system following the panic caused by the botched devaluation at the end of 1994. Banks were allowed to swap any loans they were doubtful about for (high-yielding) government bonds. The government has paid off some of these bonds, to the annoyance of the banks, and is coming under pressure from congress to refuse to pay or roll-over the principal on US$19bn worth of other loans because the banks had slipped in loans that were not eligible. The congressional auditor reckons that the four remaining banks (the others were liquidated) slipped in loans worth US$4.7bn. 

The government argues that congress does not have the right to insist on this: the issue is now before the supreme court. The supreme court's record of refusing to give the executive the benefit of any constitutional doubts suggests that it is likely to find for congress rather than the government. 

The big problem is that there has never been a proper, public audit of the loans that were transferred from the banks to the government. The banks say that the audit cannot be public because of client confidentiality: the politicians argue that the banks are sheltering behind this excuse because they have ripped off the taxpayer. In mid-August, the banks did say that they would welcome an audit of the US$90bn in loans transferred to the bank rescue agency (initially Fobaproa, now IPAB), though the terms on which the audit could take place met neither the demands of the politicians nor those of IPAB itself.

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