Things Are Getting Serious in Mexico’s Corporate Debt Crisis

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Fearing “a large-scale crisis” in foreign currency debt.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Since central banks embarked on their madcap ZIRP and QE during the Financial Crisis, emerging-market companies have not been able to resist the fatal allure of cheap dollar debt. As the good times rolled, the risks were ignored.

In relative terms, dollar-denominated debt recently reached a record 17% of global GDP excluding the US, a ratio that has doubled over the past 20 years. Some countries are more exposed than others. In its latest report on Mexico, the IMF pointed out that almost a quarter of all of the corporate debt in circulation in the country is denominated in dollars. That’s roughly the equivalent of 25% of Mexico’s GDP ($1.1 trillion in 2015).

Foreign denominated liabilities jumped 83% over the past four years to 1.7 trillion pesos ($82 billion). During the same period, Mexico’s non-petroleum exports increased by just 10%, meaning that the ability of private companies to generate the dollars needed to continue meeting their burgeoning dollar-denominated debt obligations has weakened significantly.

To make matter worse, the Mexican peso can’t stop losing value, in particular against the U.S. dollar. The Bank of Mexico has already raised the country’s benchmark rate twice since February, from 2.3% to 2.8%, but to little avail: the peso has still fallen nearly 20% against the dollar so far this year.

Hence the debt problem. According to the IMF, Mexico’s corporate debt binge is no biggie. Having dollar-denominated corporate debt worth 25% of GDP is apparently “relatively low” by today’s standards, it says. What’s more, some of the exposure is hedged.

But not everyone seems to agree, including the senior executives of some of the debt-laden corporations in question, who have begun quietly warning about the risks of their dollar-debt exposure. At a meeting last week between executives, lobbyists, and officials from the finance ministry, the participants agreed to work “in a coordinated fashion” to achieve a “more efficient” exchange rate policy. According to El Financiero, some of the business owners and experts in attendance called for “new programs” to be implemented before the situation causes “a large-scale crisis” among Mexican companies.

In other words, things are getting serious.

“These erratic currency moves do not allow us to plan and that is where authorities have a window of opportunity,” said Gustavo de Hoyos Walther, the director of Coparmex, one of Mexico’s biggest corporate lobbying groups. What he means by opportunity is anyone’s guess, but it’s probably safe to assume that it involves moving funds off public ledgers on to private ones. It wouldn’t be the first time it’s happened.




In 1982, after the government defaulted on its external debt, marking the start of the country’s lost decade, it created a fund called Ficorca to help companies service their external debts. Then, 12 years later, at the height of the Tequila Crisis, the Zedillo government used a deposit insurance fund to directly bail out many of Mexico’s biggest banks, and indirectly its corporations. In one fell swoop one of the world’s first (and worst) “bad bank” entities was born.

Its name — or at least the first name by which it was known — was FOBAPROA and it, and its future incarnation, have cost the Mexican people an incalculable sum of money and hardship. At its launch, the government said it would need total funds of just 180 billion pesos (roughly $9 billion) to clean the banks’ balance sheets. As tends to be the case whenever governments lend or give banks taxpayer funds, it was a ludicrously optimistic ballpark figure.

In 2010 the Mexican daily La Jornada reported that close to 600 billion pesos ($30 billion) had been given to the banks, most of them now foreign owned, just to cover interest payments on the rescue package. In 2007, it was revealed that Banamex, Citi’s Mexican subsidiary, used just part of the funds provided by FOBAPROA (that is, Mexican taxpayers) to buy Mexico’s flagship airline Aeromexico — off the government itself!

In October this year La Jornada came out with a bombshell report that the revamped FOBAPROA, now going by the new acronym of IPAB (standing for Bank Savings Protection Institute), had racked up a total debt of 878 billion pesos ($44 billion). In other words, a debt that was supposed to have been liquidated in 20 years continues to grow, 22 years after its inception. Thanks to the wonders of compound interest, the total debt is now 35% higher than it was in 2000, when it was $648.56 billion pesos.

And now some of Mexico’s biggest companies are gently hinting that a new round of taxpayer-funded rescues may soon be in order. They allegedly include América Móvil, Mexico’s largest telecommunications corporation whose subsidiaries are spread all over Latin America. Its only unit producing revenues in US dollars is Tracfone in the US. It also has one unit in Austria and one in the Netherlands, producing revenues in euros. The company is majority-owned by Carlos Slim, once the world’s richest man but now relegated to eighth spot (in part due to the depreciating peso), and its balance sheets are filled to the gills with dollar- and euro-denominated debt.

According to its third quarter filing, the firm has $36.16 billion in “financial debt,” of which only $5.26 billion, or 14%, is denominated in pesos. The rest (86%) is denominated in US dollars ($10.7 billion), euros ($15.5 billion), and other currencies ($5.0 billion). These sums, set against the company’s scarce dollar- and euro-denominated cash flow and a plunging peso, do not bode well.

Such problems are not unique to América Móvil: in fact, as we reported a couple of weeks ago, 80% of the short and long-term debt held by 30 of the 35 firms listed on Mexico’s benchmark index, the BMV, is denominated in foreign currencies, mostly the dollar. And for many of those companies, the peso, not the dollar, is the staple currency of their revenues. Some, such as mega-retailer Liverpool, whose debt is 65% dollar denominated, earn no dollars at all.

It’s a recipe for a very serious debt crisis in a country that’s still paying the price for the last one 22 years ago. By Don Quijones, Raging Bull-Shit.

Last year, the Bank of Mexico tried to slow the stampede out of pesos by selling a small but growing fraction of its dollar reserves in open auctions, but to little avail. Read…  Financial “Hurricane” Trump Is Approaching Mexico




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  15 comments for “Things Are Getting Serious in Mexico’s Corporate Debt Crisis

  1. SteveW
    November 28, 2016 at 10:16 pm

    Looks like it is time for Mexico to mint silver pesos

  2. unit472
    November 29, 2016 at 9:33 am

    Seems like a real ‘opportunity’ for Mexico’s drug cartels trade their dollars for stakes in Mexico’s companies.

    • Mike Earussi
      November 29, 2016 at 12:00 pm

      Maybe that’s the real reason the Mexican government is not too keen on taking down the drug cartels, they’re the primary “corporations” that are earning $. Without their foreign exchange earnings Mexico would be in even worse shape.

  3. MC
    November 29, 2016 at 10:24 am

    I suspect the reason for this mad scramble for USD and EUR denominated bonds is financial repression across the former First World. We have been driven to such depths of desperation we are ready to accept lending money to Pemex for 31 years at 6.75% coupon (maturity: 2047). Yes, that Pemex.

    The case of Liverpool is particularly enlightening: despite zero revenues in foreign currencies, they’ve just issued US $750 million worth of bonds maturing in 2026 and carrying a pathetic 3.875% coupon.
    The world is that starved for yield.

    As Mark Twain wrote, history does not repeat itself but rhymes an awful lot of times.
    This situation rhymes an awful lot with the 1997 Asian Crisis. After Thailand was forced to float the baht and Asia bulls were trying to salvage their (unhedged) bets, it was discovered many South Korean chaebol had leverage ratios exceeding 400% and little, if any, revenues in US dollars and Japanese yen but this had not been factored in the risk to determine yield. Further investigation turned up lenders simply expected the Korean government to bail them out and hence had underestimated the risk factor by… a lot, really.
    Truth to be told the Korean government tried to bail the chaebol out as expected but found the task far exceeded its resources and threw the towel in.
    Mexico may be in a very similar if not worse position, as Pemex continues to swallow government funds instead of contributing to them and the peso continues sinking.

    • Maximus Minimus
      November 29, 2016 at 2:04 pm

      I suppose, by Liverpool, you mean FC Liverpool. Not a big fan of soccer lately, but I am amazed how much the supposedly low income fans can splurge on sports – even when the world is falling apart. These soccer club bonds are as good as government bonds.
      With regard to the Asian crisis, the same mistakes and false premises will be repeated time and time again. Everything is so painfully clear with the benefit of hindsight.

    • Cesar Santa Gadea
      November 30, 2016 at 7:30 pm

      After more than 30 years of a fiscal pact where Mexico Treasury milked Pemex as hard as it could while allowing the Mexican elite to sustain a low taxation level that actively favors them, at the cost of underfunding the improvement in infrastructure, health, education and God sake security, Pemex Bill has come due.

      A more common tax policy plus an oil fund based program focused on improving Mexican structural deficiencies must have had changed Mexico Forever.

      Sadly this is a lost opportunity. However, I find great irony that PEMEX death bill has come due. Let us hope, the financial pain of the private sector teach a hard lesson to the Mexico elite. From my personal perspective, I will just sit and enjoy the fire.

  4. Kent
    November 29, 2016 at 10:50 am

    How is it that these so-called private, capitalist firms always seem to walk away with piles of dough and leave the government/social sector to pay off the debt?

    And why is it that big American banks always seem to be lurking in the background somewhere making tons of money off of the crime?

    • Captain Kurtz
      November 29, 2016 at 11:46 am

      Yes, how is it that capitalist outfits always privatize the profits, and socialize the losses?

      I think because corporatism, an oligopoly of massive multi-nationals, creates behemoths that quickly become too big to fail, take on too much debt when they get in trouble, then when they fail, they threaten to take down the whole system….

      Genius how that works

    • Mike Earussi
      November 29, 2016 at 12:03 pm

      Because they’re the ones who invented the game, and the “House” always wins.

  5. Alex
    November 29, 2016 at 2:16 pm

    Don Quijones, I’m curious to know where did you get the following figures: “83% over the past four years to 1.7 trillion pesos ($82 billion)”.
    Not hating or doubting is true, just asking.
    Thanks!

  6. Kasadour
    November 29, 2016 at 2:43 pm

    Once their oil revenue dried up, that was it for Mexico. I guess drugs is the new oil, fiscally speaking.

    Just wait until Yellen raises the daily funds rate a half of a half a basis point! That’ll put the final nail in the coffin for Mexico’s USDD debt.

  7. Humpty Dumpty
    November 29, 2016 at 6:33 pm

    Pemex is saddled with debt and cannot get its operations updated without a lot more debt – the price of oil says, probably not going to happen. The cartels are moving vigorously into agriculture: avocados particularly and next up: food processors. They do this by killing workers, not managers; a really effective way to bring the companies around to the cartel way of thinking. The financial sector/government has no dividing line: it is simply pigs who respect other pigs’ trough claims and on it goes. The labor laws ensure unemployment (would you train and develop any employee when after a year he can NEVER be terminated without huge payouts to him AND the local state?) The multinationals all have 100% turnover of Mexican employees PER YEAR to avoid paying penalties – wages suck as a result and everything stays the same while the Mexican people keep electing liars who tell them they are going to light a fire under the corporations – and thereby sustain a failed state. I like to read in the comments section here the same crap about corporations I hear in Mexico – it has nothing to do with the legal structure of a business that determines the cost of bananas, it has to do with the government corruption that favors one over the other – competition is nonexistent except at the street level – that is a result of government policies that favor unions and businesses who pay the piper. Mexico will get worse, much worse – the ONLY light at the end of the tunnel will be exports to the US and that is about to get expensive if Trump has his way – for example, right now, try shipping a pack of gum to someone in Mexico via UPS, FEDEX or USPS – it will not get there – seized by Mexican customs as a matter of policy. Everything is to protect the ruling elite’s control of the entire economy. They will not be able to withstand the squeeze the US puts on them AND the demands of their own people – it will not end well, not at all.

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