null PREVENTING AND MITIGATING A FINANCIAL CRISIS IN MÉXICO
| Jurisdiction | Derecho Internacional |
(April 2003)
PREVENTING AND MITIGATING A FINANCIAL CRISIS IN MÉXICO
Borda y Quintana, S.C.
Mexico City, Mexico
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I. Introduction
II. Background
A. 1982 Financial Crisis
B. 1995 Financial Crisis
III. Current Situation
A. Economic Situation
B. Political Situation
IV. How to Prevent and Mitigate the Risks of a Financial Crisis
A. Mitigate Risks
1. Domestic legislation
a. Constitution
b. Expropriation Law
c. Federal Law of Patrimonial State Responsibility
2. International Treaties
a. NAFTA
b. APRI's
B. Prevent Risks
1. Domestic Legislation
2. International Treaties
3. Political Risk Insurance
4. Contractual
V. Conclusions
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I. INTRODUCTION
The recent financial crisis in Argentina reminded all foreign investors that developing countries are subject to this type of adversities which will affect their business plans and their rates of return usually without previous warning.
The purpose of this paper is to analyze how foreign investors in Mexico can protect their investments if Mexico would face a severe financial crisis such as the one Mexico suffered in 1982 and 1995 or the recent crisis in Argentina where there was a mandatory currency conversion and exchange control.
Although Mexico has different economic, political, financial and legal circumstances than those in 1982 and 1995 as well as those in Argentina, it is important to review how investors can prevent or mitigate the effects of a severe financial crisis in Mexico based on the existing legal framework or the enactment of new legislation.
II. BACKGROUND
From 1958 to 1970 Mexico had one of the most favorable economic developments in its history. During that period, Mexico averaged per year: 2.5% inflation rate, 6.8% real average growth of the GDP, 2.6% fiscal deficit, interest rate 8.2% and cero variation in the currency exchange rate.1
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A. 1982 Financial Crisis
The Mexican economy had a huge economic growth2 because of the new oil discoveries of the Campeche basin in the Gulf of Mexico. Mexico received billions of dollars from oil exports in the late 70's and early 80's during the administration of former President Jose Lopez Portillo due to the high crude oil prices. Additionally, international commercial banks were eager to make loans to Mexico considering that Mexico would become a rich country.
However, the price of crude oil declined during the summer of 1981 and Mexico continued the heavy public spending and incurred in a significant fiscal deficit. The cost of the Mexican debt was increased substantially because the interest rates in the United States in 1982 were almost 20%. Investment funds and other sophisticated investors detected this situation and started to transfer their funds out of Mexico. The international reserves of the Central Bank of Mexico decreased to less than one billion dollars. Mexico declared in August of 1982 a three month moratorium3 of the principal of its external debt arguing to the banks that it needed to restructure its debts. At the end of 1982 the fiscal deficit was almost 17% of the GDP and inflation had increased to almost l00%.4
B. 1995 Financial Crisis
The 1995 financial crisis was caused by major political problems Mexico encountered during 1994 during the administration of former President Carlos Salinas de Gortari and the failure of the government to react timely to those events.
An armed rebellion in Chiapas surprised the government on January 1, 1994, which was the date NAFTA became effective. In March of that year the presidential candidate was assassinated. In September of that same year the Secretary General of the PRI was killed.
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Mexico had significant debts in dollar denominated TESOBONOS and the international reserves of the Mexican Central Bank were declining at a very fast pace to less than 8 billion dollars. In addition to these problems, the government continued issuing TESOBONOS for more than 30 billion dollars in order to avoid the collapse of the international reserves which would have been depleted by June of 1994.5 The United States and the International Monetary Fund put together a financial package and Mexico was able to repay close to 30 billion dollars in TESOBONOS.6
III. CURRENT SITUATION
A. Economic Situation
As indicated in Exhibit "A" attached herewith, the current macroeconomic indicators are much more favorable than those in 1982 and 1995.
A decree amending Article 28 of the Mexican Constitution provided the Central Bank of Mexico with complete autonomy. The Central bank has a Board integrated by one Governor and five Vice Governors which may only be removed by severe wrongdoing.7
The Government of Mexico has successfully restructured its debt in order to avoid a cash flow problem such as the one Mexico had in 1995. During 2001 for the first time the Mexican government placed a 30 year bond for US$1.5 billion and another for US$1 billion that same year with a maturity of 10 years with an interest rate of 7.5%. This enabled to lower the cost of debt, and finance some of the 2002 payment obligations.8
B. Political Situation
In the past year we have seen a real division of the three branches of the federal government. This division of powers commenced with the arrival of a new political party, the PAN, to the presidency of Mexico in the year 2000. In 2002 the Supreme Court of Justice issued two very significant rulings in
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connection with the daylight savings time and the electric power decree. The first ruling made clear to the President that the he did not had the authority to impose the daylight savings time; it should be the Mexican Congress because it is the only authorized by law to amend the Federal Law of Meteorology which established that a day has 24 hours. The second ruling declared that the President could not amend the Electricity Regulations which intended to increase the sale of electricity from self use and cogeneration power plants to the Federal Electricity Commission (CFE) and also stated that the amendments to the Electricity Law made in 1992 may have been unconstitutional.
The Mexican Congress has also been very independent from the Executive branch, since the PAN, the President's political party, nor any other political party, has absolute majority in any of both houses of Congress. 9 On the other hand, one of the negative consequences of this new democracy is that legislators are acting more on partisan and political views rather than focusing on the very much needed structural reforms. The federal elections in July of this year, to renew the Chamber of Deputies, are creating a difficult scenario for the building of the very much needed consensus to pass the necessary legislation and structural reforms. This legislature has more than one thousand accumulated pending bills.10
IV. HOW TO PREVENT AND MITIGATE THE RISKS OF A FINANCIAL CRISIS
A. Mitigate Risks
1. Domestic Legislation
a. Constitution
i. Amparo lawsuit
One of the most useful legal tools under Mexican domestic law against an illegal act of authority, such as the federal government issuing a decree that
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imposes a mandatory conversion of dollar denominated accounts into Mexican pesos, such as the Argentinian pessification, is the amparo. The amparo is similar to the habeas corpus
The amparo lawsuit (juicio de amparo) is established under articles 103 and 107 of the current Mexican Constitution of 1917 and the Amparo Law Regulatory of Articles 103 and 107 of the Political Constitution of the Mexican United States (Ley de Amparo Reglamentaria de los Artículos 103 y 107 de la Constitution Política de los Estados Unidos Mexicanos).
The purpose of the amparo is to resolve the following kind of disputes:
I. law or acts of the authorities which violate individual guarantees;
II. law or acts of the federal authority which violate or limit the sovereignty of the States;
III. laws or acts of the authorities of the States which invade the federal authority competence.11
When the federal government converted the dollar denominated bank accounts to mexdolare, the exchange rate for one U.S. dollar was almost twice but banks paid their customers only $69.50 pesos per dollar. A significant number of people filed an amparo lawsuit against the federal government arguing that they had made deposits in US dollars. There is jurisprudence indicating that the banking deposit of money unlike the civil or mercantile deposit transfers the property of the Mexican or foreign currency; the obligation of the...
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