Big-Oil Sinkhole of Debt & Corruption Gets Taxpayer Bailout. Wall Street Thrilled

Taxpayers in Mexico Brace for a New Round of Plunder

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

How the mighty are fallen. Pemex, Mexico’s state-owned oil giant, once a goliath on the global energy scene, is now dependent on state aid to meet its day-to-day needs. Mexico’s Finance Ministry announced a series of measures aimed at loosening Pemex’s financial strains, giving the state-owned giant a decidedly short-term $4.2 billion liquidity boost.

That includes a capital injection of $1.5 billion, as well as a credit facility for a further €2.7 billion to pay down pension costs this year. The company will also receive tax breaks that will allow it to deduct more of its exploration and production costs.

But it’s a mere drop in the barrel compared to the $30.3 billion in losses the company racked up last year, its $90.5 billion in pension liabilities, and its debt which is expected to surpass $100 billion later this year.

The Markets were thrilled by the announcement.

“This is good, because it is comprehensive and it deals with the main issues,” said Alexis Milo, an economist at Deutsche Bank in Mexico City. “The reaction of markets will be positive because this is the beginning of the structural changes that markets were expecting.” As soon as the news broke, Pemex’s CEO and Mexico’s Finance Minister were on a plane to Wall Street to try and drum up investor support for the ailing oil company. Now they know that Mexico’s taxpayers have Pemex’s back — at least for now — investors are likely to view the company more favorably.

Mexico’s taxpayers are unlikely to be quite so enthused by the news, especially given the prospect of this being just the beginning of a growing trend. According to Mexico’s Business Coordinating Council, Pemex doesn’t just have temporary short-term liquidity problems, as the Finance Ministry contends, but is suffering from a structural deterioration that poses a serious threat to its long-term viability.

This deterioration is the result of “decades of bad management, lack of vision, negligence, abuse and in many cases, corruption.” The Mexican daily La Jornada went further, arguing that the company has been systematically “plundered” during successive administrations, including, of course, the current one.

The Three Plunderers

There are three prime agents behind this plunder. The first is the company’s burgeoning ranks of senior management and administrators. In the last four years alone their number has tripled. Despite Pemex’s growing losses they have awarded themselves generous salary rises and lucrative perks, including three executive planes, a helicopter, and 911 company cars and SUVs.

The second group of plunderers are the untouchable, unsackable leaders of Mexico’s oil workers’ union. At the top of this group is Carlos Romero Deschamps, a man who was prominently featured in Forbes’ 2013 ranking of the 10 most corrupt people in Mexico. Despite earning a monthly salary of just $1,864, Descamps was able to gift his son a $2 million limited edition red Enzo Ferrari. According to political analyst Denise Dresser, in 2011 alone he received $21.6 million for “aid to the union executive committee” and $15.3 million from union dues.

In 2013 the Mexican daily La Vanguardia revealed that Deschamps’ sister, brothers-in-law, and an assortment of nephews, nieces and cousins were all on Pemex’s payroll, with contracts guaranteed until the year (and this is no typo) 2999. None of them appeared to actually do any work for Pemex.

Deschamps is one of scores of senior union officials bleeding Pemex — and by extension, Mexican taxpayers — dry to the bone. None of them are under investigation by Peña Nieto’s administration. In fact, most of them are highly connected, card-carrying members of Peña Nieto’s own party, the Institutional Revolutionary Party (PRI), which has held power in Mexico for 75 of the last 87 years. Deschamps himself is now a PRI senator.

The third group of plunderers are the legions of Pemex contractors that have been flagged up by auditors for serious accounting abuses or irregularities. A special Reuters report last year showed that from 2008 to 2012 congressional auditors issued 274 recommendations that Pemex take serious action over contract irregularities – meaning it should either press criminal charges, discipline employees or claw back money. “The company issued responses to 268 of the cases, but in only three of them was action actually taken.”

Reuters identified more than 100 Pemex contracts signed between 2003 and 2012, worth $11.7 billion, that were found to have serious problems by the Federal Audit Office of the lower house of the Mexican Congress. In some cases the work was never even done; in one case the contractor who received the funds was a notorious drug trafficker. In total, the shady deals equate to approximately 8 percent of the $149 billion in Pemex contracts registered in Mexico’s federal contracting database in that period.

“In Mexico, no one gets punished,” said Arturo Gonzalez de Aragon, a former head of the Federal Audit Office, known in Mexico by its Spanish acronym, ASF. “If you don’t punish anyone, impunity becomes a perverse incentive for corruption.”

A Stark Contrast

In recent months a huge media spotlight has been trained on Brazil, where serious efforts — albeit partially politically driven — are under way to root out the rampant corruption affecting both the executive and legislative branches of government as well as the state-owned oil company, Petrobras. Some of the country’s richest and most powerful figures, including billionaires, have been hauled off to jail for bribery, money laundering, tax evasion, and corruption, and sentenced to multi-year prison sentences.

In Mexico, by contrast, corruption is more pervasive and than ever. Both Mexico’s President Enrique Peña Nieto and the government he heads have been mired in one corruption scandal after another, with zero consequences. Nor was it much of a surprise that when the government introduced sweeping new energy market reforms in 2014, it barely touched upon the issue of Pemex’s rampant culture of corruption.

That same government has just injected over $4.2 billion of taxpayer funds into Pemex, which is now a sinkhole of both corruption and debt. That money will not be nearly enough to stop the rot, especially if large parts of it are siphoned off by crooked contractors, executives, unions, and politicians. In the most perverse of ironies, the more money that goes AWOL, the more taxpayer funds will be needed to plug the gaping gaps, which will present even more opportunities to plunder Pemex. By Don Quijones, Raging Bull-Shit

It was just a matter of time before Pemex began dragging down the national economy it had sustained for over 75 years. But now a nightmare is coming true. Read…  Debt Spiral Grips Both, Pemex and Mexico

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  20 comments for “Big-Oil Sinkhole of Debt & Corruption Gets Taxpayer Bailout. Wall Street Thrilled

  1. nick kelly says:

    I thought it was Pemex propping up Mexico- can two drunks hold up each other?

      • Larry says:

        Well if they are both laying down to start with, they can.

        Well sadly mexico doesn’t have the financial services and industry we have at the US. Otherwise their bonds would be bought by private investors or the central bank instead of taxpayers.

        Hell all the oil countries plus us will be hit soon with oil buildup and slow world growth.

        This mexico stuff is small time with what will happen in future.

        Low oil prices, china low gdp or recrssion, then countries will have more negative rates and smash banks. I dont even know about all the foreign corporate, us debt then government debt and what will happen.

        Most people want a natural life, so the givernments are always gonna prop this stuff up, otherwise family values would tank, almost dont care for the most part.

    • CENTURION says:

      No. They need a 3rd drunk to form a stable Tri-Pod. So, to Pemex and Mexico, add 50 million unemployed on Mexican welfare…..and the 10 million that will be sent back by Trump.

      • MC says:

        They can always form a strategic alliance with Petrobras or PDVSA.
        That ought to take care of it.

        All these semi-bankrupt oil conglomerates will get their vacation from pain soon: with Doha underway, oil prices will most likely skyrocket next week, driven not by fundamentals but by the usual soothing statements financial markets seem to run on these days.
        If this “production freeze” works as well as the past one Russia, Iraq, Kuwait etc will hit new production records in a matter of three months. And it won’t matter, because financial markets have somehow decided supply and demand don’t need to readjust before having “fair” oil prices.
        Let’s see if they’ll stick to their guns when those VLCC’s moored off Quingdao, Singapore, Antwerp etc will start dumping their cargo in the yuppies’ swimming pools.

  2. chip Javert says:

    Seeing how fast socialist governments run through even the spectacular oil riches of Mexico, Brazil and Venezuela is breath-taking.

    Then, of course, so is the USA infatuation with Bernie Sanders.

    Had a beer conversation with a Millenial friend the other night – I asked him how many deaths were caused by socialism in the twentieth century. His answer (after considerable thinking) was “probably less than the USA killed in Viet Nam”, which he insisted was 5,000,000. When I told him range of numbers I’d seen for VietNam was 1.3-3.3M (military + civilian, all sides), and that another 80-120M were killed in WW1 & WW2, he flatly refused to believe me.

    Nothing beats a fact-free Millenial lecturing on the benefits of socialism (he couldn’t even identify the WW2 axis & allied powers).

    • NotSoSure says:

      That’s 20th century. In the 21st century, the question would be how many deaths were caused by US style neoliberalism?

      Also, counting deaths is easy, how about suffering. The empire supports among many other things Wahabism in Saudi Arabia, ISIS, etc, etc. So the question is how many people has to be suffer/die to support an average US citizen?

    • walter map says:

      Don’t worry chip. Capitalism will always be around so long as socialism is there to bail it out.

  3. Petunia says:

    As I read this, it only reminded me of how much the US now resembles Mexico. I think we are going to need a bigger wall.

  4. Ptb says:

    Rape the public for the sake of the privileged and then demand austerity from them when the debts ar due.

    • walter map says:

      When I give food to the poor they call me a saint. When I ask why the poor are hungry they call me a communist.

      Happens every time.

  5. rich says:

    In Mexico, these stats me tell the tale. Look what’s happening to Mexico’s tax rates. The corporate tax rate is absolutely stunning.

    • Chicken says:

      rich, Low is stunning? Not sure what you’re saying here…

      • rich says:

        Yes, it’s 25% lower than the US corporate tax rate.

        • walter map says:

          Does that make it easier to evade?

        • Chicken says:

          Mexico doesn’t hand $600B to specialty contractors every year for the purpose of waging war. Imagine if bombs were falling from the sky, would you be inclined to join the resistance?

  6. Chicken says:

    The US prefers to import oil from corrupt countries, anything to keep the military machine chugging along.

  7. Jungle Jim says:

    **Markets are thrilled**

    Back in the 1930s a reporter asked Al Capone if he invested in the stock market. He smiled and said,”Nah, those guys are a bunch of crooks”. He was right, and nothing has changed.

    • Robert says:

      I always liked Richard Ney’s take (from The Role of the Specialist)

      “The story is told that after he had been deported to Italy, Lucky Luciano granted an interview in which he described a visit to the floor of the New York Stock Exchange. When the operations of floor specialists had been explained to him, he said, ‘A terrible thing happened. I realized I’d joined the wrong mob’” (1Ney, 8).
      It was with these words that Richard Ney began his first of three books on the nature of the New York Stock Exchange. Ney wrote at a time when a 750 Dow was high and today’s volumes were beyond imagining. Some of his material is dated, and must be read in the light in which it was written. But the main premise of his books is still true: that the specialist exists not to ensure the free and orderly trade of stock in a particular company, but to fatten upon the innocence and ignorance of the small investor.

      The New York Stock Exchange is not an auction market (2Ney, 86), though many investors still hold onto that image. It is a rigged market. Volume is an effect of price. Prices are controlled absolutely by the specialists, the ‘market makers’ in individual stocks. It was this discovery that led Mr. Ney to eventually give us small investors a priceless gift: enlightenment.

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