So Where Does the Money Go that Mexico Borrows?

Answers emerge. Including offshore private accounts.

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

Mexico’s public debt-to-GDP of 50% may seem modest by today’s inflated standards, but when it comes to debt, everything is relative, especially if you don’t enjoy the benefits that come from having a reserve-currency-denominated printing press, and if you borrow in a foreign currency that you don’t control.

As the debt load grows, more and more of the States’ financial resources must be used to service it. As El Financiero reports, the cost of servicing Mexico’s debt, despite super-low interest rates globally, has almost doubled in the last five years, and is now higher than it has been at any time since 1990. In fact, according to the Government’s own figures, more state funds will be spent this year on servicing the debt than on all public infrastructure projects put together.

Yet as the government scrimps and saves in areas that might actually help to boost economic growth, it’s more than happy to dig deep to fill its own pockets.

A joint investigation by the news website Animal Politico and the NGO Mexicans Against Corruption and Impunity has revealed that, amidst all the budget cuts, the Peña Nieto Government has been using a complex web of shell companies to make hundreds of millions of dollars of public funds, originally intended for public causes such as combating poverty or financing public education, completely vanish.

In other words, much of the money that was meant to alleviate the crippling poverty affecting Mexico is now sitting in offshore private bank accounts.

Unsurprisingly, one of the biggest conduits of the illicit funds was Mexico’s erstwhile sugar daddy, Pemex, which, as we reported last week, has been financially bled to the verge of collapse by its swollen ranks of senior managers and administrators, corrupt politicians, shady contractors, and the untouchable, unsackable leaders of the oil workers’ union.

But the corruption at Pemex is apparently even worse than we originally thought. A fresh scandal has erupted that implicates a number of senior political figures in the systematic theft of oil from the pipelines that crisscross the country’s landscape, which is now the second most profitable source of funds for Mexico’s criminal gangs, behind the trafficking of drugs. The pilfered oil is sold at half the price (or less) of what drivers would have to pay at a Pemex gas station.

At the core of the scandal is Javier Lozano, a senator from Puebla, the region most affected by Mexico’s Gas Wars, who was recently shown in a photograph sharing a drink with Othón Muñoz Bravo, AKA “El Cachetes” (The Cheeks), allegedly one of Mexico’s most prolific huchicoleros (gas thieves). Muñoz Bravo was recently detained by Mexico’s marines along with a bountiful stash of drugs and military-grade weapons.

Lozano, a senator for Mexico’s National Action Plan (PAN) party, denied knowledge of Muñoz Bravo’s criminal past or that he had received funds for his political campaign from him. That was just days before another photograph surfaced showing Lozano receiving the keys to a luxury Cadillac jeep from a group of businessmen including Muñoz Bravo. The jeep was not declared to Mexico’s electoral authorities but was nonetheless used to shuttle Lozano from one venue to another on the campaign trail for the 2012 general elections.

There are also allegations, as yet undenied, that the former governor of Puebla and presidential aspirant, Rafael Moreno Valle, held his election victory party in 2010 at a luxury villa belonging to Muñoz Bravo in Puebla.

According to Lozano, many “local politicians knew Muñoz Bravo and had relations with him.” He himself was first introduced to the alleged oil thief by Moreno Valle’s cousin, Sergio Moreno Valle, a local MP who also appears as a singatory on the foundation deeds of a number of Muñoz Bravo’s companies, which included four Pemex-franchised petrol stations.

That’s right: Muñoz Bravo, one of Mexico’s biggest gas thieves, was apparently selling gasoline pilfered directly from Pemex’s pipelines to local customers through Pemex’s own pumps, and pocketing the difference. Those customers apparently included a number of Puebla’s public bus operators.

Whether senior politicians such as Lozano and Moreno Valle directly facilitated Muñoz Bravo’s licensed operations in Puebla and the business relations his companies seemingly enjoyed with a number of Puebla’s public institutions is yet to be proven. What is clear is that during Moreno Valle’s six-year reign as governor of Puebla is that the number of illegal pipeline taps in the state increased by 1,800%, from 108 in 2010 to 3,052 in 2016.

Perhaps the greatest tradegy of all is that both of the scandals highlighted in this article, implicating the governing PRI party and arguably its biggest contender in the next elections, PAN, are mere drops in the ocean of corruption that has infected Mexico’s entire body politic, from top to bottom.

At every stage of the corruption cycle, there’s money to be made. The more the politicians plunder, the larger the holes grow in the country’s public finances. Then, inevitably, more debt is needed to plug those holes.

That’s here where the banks, both Mexican and foreign, come in. Of particular note are Bancomer, a subsidiary of Spanish giant BBVA, and Interacciones and Banorte, both of which belong to the Hank Gonzalez dynasty, one of Mexico’s richest families which, through its intimate, decades-long ties with the governing PRI party, has been able to massively expand its lending to local and state governments.

These three banks alone own over 60% of all of Mexico’s municipal and state debt. According to the weekly news magazine Proceso, Interacciones’ lending to the Mexican government grew 17-fold between 2004 and 2014.

As long as corruption in Mexico continues to grow, so too will the banks’ profits — until one day, there’s no money left. And that’s when the taxpaying middle class, who’ve single-handedly funded this orgy of greed and excess, will be left with a tab they won’t be able to afford. By Don Quijones.

For Pemex, things keep getting worse for a slew of reasons. But one stands out, and it’s not the price of oil. Read…  How Did Things Get This Bad This Fast for Oil Giant, Pemex?

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  16 comments for “So Where Does the Money Go that Mexico Borrows?

  1. Joan of Arc says:

    Yet the richest man in the world hail from Mexico. You would be wrong if you guessed his name as Slim Pickens. No, his name is Carlos Slim. His last name is Helu, denoting his family roots in Lebanon. No, he is not of Native American heritage.

  2. cdr says:

    The larger the population, the more passive the people. It’s easy to motivate a small group. It’s easy to pacify a large group. Since Mexico has no big brass ring to grab for, no changes are anticipated. A few crooks will continue to do whatever they want. The rest of the people will get what they get and be happy for it.

    On a larger scale, this same mentality was taking over in the US. Globalists wanted low interest rates, low wages, and flexible labor sources. They had the means to sell it, too. They could make you feel guilty for not wanting the same things. They are on the ropes but not even close to being out of the game here. Normalized interest rates will end them. Without normalized rates, expect the US to be a cross between Mexico and the Eurozone, and Japan withing a few years.

  3. TJ Martin says:

    All those surprised at Mr Quijones revelations here accurate and timely as they may be please raise your hands.

    I mean really .. if they can do it here in the US with our supposedly having one of the most educated populations in the world … and they have … they sure as hell can do it in Mexico where in many cases any form of education remedial or otherwise is almost impossible to come by

  4. cdr says:

    No, we do not have endless money printing, such as in the Eurozone or Japan, but we do have a targeted equilibrium due to reinvestment of maturities. We have no assurances that rates won’t go negative in a few years. The common wisdom does not condemn prolific money printing, allowing it to remain a possibility in the US for later.

    A change at the Fed, replacing the current FOMC globalist pleasers with people who respect the cost of capital and how it relates to savings, will make a difference.

    • TJ Martin says:

      1) Actually CDR we do have unlimited printing capabilities and in fact have exercised them numerous times over the decades

      2) There is nothing even remotely resembling common wisdom in this age of hyper verging on anachro capitalism we’re deeply embedded in . Suffice it to say wisdom common sense and discernment have at least for the moment been put out to pasture .. along with responsibility etc

      3) Every businessman large or small to some extent is a Globalist as is any politician genuinely worth his or her salt . The fact is no business ( or country ) currently large or small could exist if it were not for the Global Economy .The only question is where in each specific case do their priorities and allegiances lie .

      4) Which is to say with no insult either intended or implied your continued misuse / abuse of the term ‘ globalist ‘ is both vague , over generalized and counterproductive to what are some genuinely reasonable and accurate arguments you present . Not to mention portraying you as a ‘ victim ‘ rather than an individual of discernment and intelligence which I assume you are

      Therefore in conclusion and in light of the above facts the odds of the next Fed being anything other than another Globalist is about equal to that of a slushy snowballs chances in the depths of hell .. which is to say … none at all .. especially in light of who’ll be appointing him/her . The chief globalist posing as a neo populist of them all

      • marty says:

        “..this age of hyper verging on anachro capitalism we’re deeply embedded in…”

        ?!? If you meant anarcho-capitalism, you need to do some research. We are “embedded” in no such thing. Anarchy is the absence of state and capitalism is free markets. We have neither. We’re choking to death with a boot on our throats from too much government at every level. And we most certainly do NOT live in a capitalist economy. Under capitalism, there would be no central bank, and no multinational corporations.

      • cdr says:

        Hi TJ,

        I said we’re not printing endlessly TODAY. But it’s still up in the air if we might again in the future. The BOJ and ECB ARE printing endlessly today, and the Eurozone will end when the ECB stops printing. The BOJ does it for unknowable reasons and may never stop. (Also, negative rates serve as a form of taxation to pay for sovereign debt monetization by the ECB and BOJ)

        Globalists are the modern day equivalent of the Robber Barons of the 19th century. At one time people robbed banks. Then they bought banks to exploit them. Now they control Central Banks by putting their people in control, all of whom are replaceable if they don’t toe the line. Popular monetary economic theory is controlled using think tanks and a simple carrot and stick. If you want a good job you follow a particulate line of thought. If you don’t you are marginalized from the mainstream. Easy and comes across as just following the common wisdom. Add a little math and it looks scientific.

        The globalists are the upper 1% of a class warfare system. They want low rates, low wages and flexible labor sources to make even more money at the expense of those they exploit. They maintain their position by controlling who get elected into important political posts and by controlling what is believed in academia that might influence their wealth adversely.

        To get rid of them you simply raise interest rates to what would appear to be a historical norm.Tightening up the borders won’t hurt either as will ending bad trade treaties. Right now we are at two out of three. Rate normalization, combined with balance sheet reduction, will end their control and put everyday people back in charge again. The globalists will have to be content with being a part of the whole and no longer the ruling 1%. Without rate normalization, the globalists will remain our masters, however.

        • cdr says:

          Also TJ, The globalists like to look progressive and want you to think they are your friends. All the best things they say they want for you will ultimately be a slow but constant wealth transfer from you to them, while they chide you for not wanting all the good things they offer.

  5. Lee says:

    So what?

    Just a modern variation of what has been going on Mexico for the past hundred years plus.

    Nothing ever changes in regards to corruption in Mexico.

  6. raxadian says:

    This probably makes people there miss the Tequila effect.

  7. walter map says:

    Lend out millions to cronies who launder it back to you and don’t pay it back, and then blame your patsies and beg for bailouts. Lose the paper trail, stash the loot in off-shore accounts and call it a business model.

    In other news, the government lends to banksters interest-free, who then lend it back with a fat margin. None dare call it a giveaway. Meanwhile the real economy starves and wonders where all the money went.

    Capitalism. Ya gotta love it.

  8. mvojy says:

    Did you forget that most of Mexico’s debt is denominated in foreign currencies? This is because investors don’t want to be repaid with the plummeting pesos.

  9. gorbachov says:

    Most of the countries in the word are corrupt. For some reason
    The northern countries and japan are most free of graft.Corruption makes it hard to advance when money is not reinvested in the country and only stolen.You can see why so many are trying to get to an honest country where they have a shot at progress.Immigrants I know claim they keep voting for the same corrupt guy because if they voted for a new leader they knew he would first have to get rich by stealing and only
    then would he invest in the country.The old leader already is rich and
    is more likely to do a better job
    I know you should try and fix things from within but if you look
    at Mexico only a fresh start will give most people a chance

    • Lee says:

      “The northern countries and japan are most free of graft.”

      Guess you’ve never lived in Japan!!

      Japan has corruption and graft and influence peddling – they just hide it well.

      You only see the big cases when the powers that be get ticked off at someone.

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