President-Elect of Mexico’s Bombshell: Economy in “Situation of Bankruptcy”

And why are Bank of Mexico executives and employees resigning in droves?

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

Around 200 central bank employees, including 20 senior executives, have left their posts at the Bank of Mexico (Banxico) since presidential elections on July 1 handed a resounding victory to populist Andrés Manual Lopez Obrador (or AMLO). Unsurprisingly, their sudden departure has a lot to do with money.

One of AMLO’s manifesto pledges was to slash salaries for senior government officials and bureaucrats as part of sweeping cost-cutting measures. So far, he’s kept to his word. Last week, Congress, now under the majority control of his party, Morena, passed a law that will make it impossible for any state employee to earn more than the president. The gross monthly salary of the current president, Enrique Peña Nieto, is 209,135 pesos ($11,700). AMLO has pledged to cut the salary in half when he takes over the post on December 1.

The law will come into force in January and will apply to all three federal branches of government as well as regional and local government institutions. This could be a major problem for employees of Banxico, since all of them are considered public officials and many of them earn more than the current president. The average monthly salary of a Banxico board member is 365,000 pesos ($19,400), around 70% more than Peña Nieto’s and over 230% higher than the salary AMLO has pledged to pay himself.

Banxico has refused to comment on the matter but it’s safe to assume that the gathering exodus of central bank employees has at least something to do with AMLO’s plan to slash their salaries. Mexico’s central bank workers, it seems, are less enthralled by the austerity principle when it’s applied to their own income rather than others’. Naturally, many of the officials leaving Banxico will slot seamlessly into better paid jobs in the private sector, where their expert knowledge and lists of handy contacts will be put to excellent use.

The departure of hundreds of central bank workers could also be a sign of how relations may evolve between Mexico’s new government and its top financial regulator and lender-of-last-resort. The president elect has already ruffled feathers at Banxico with a fiery speech during his “Thank-you Tour” of Mexico last week. While vowing not to impinge on the central bank’s much vaunted independence — independence from the interference of politicians, not banks — he also warned that if economic problems do emerge in the future, it will not be his or his government’s fault.

“We are only going to invest and spend what comes into public coffers; we are not going to fall into what is technically called a deficit,” he said. “We will not act irresponsibly… We will respect the Bank of Mexico’s independence, so that there is macroeconomic balance and no inflation.” But if economic conditions deteriorate, he added, “it will not be the President of the Republic’s fault, but rather due to external circumstances or the Bank of Mexico’s poor handling of financial policy.”

It’s a shot across the bow, with a stark message for Mexico’s central bankers: tread carefully. It’s the first time in a long time that a Mexican president — or in this case, a president-in-waiting — has adopted such an adversarial tone towards the country’s central bank.

But that was not the most incendiary part of AMLO’s speech. That honor goes to the part where he said that Mexico’s economy is already bankrupt.

“Because the country is going through a very tough economic situation, a situation of bankruptcy, we may not be able to fulfill all of the demands being made of us, but rest assured we will fulfill all we promised in the campaign.”

It’s an odd remark, coming from a man who is on the verge of becoming president, particularly one who seconds earlier had promised to act responsibly in economic matters. Presumably, after making so many lofty promises to so many people during the election campaign, AMLO is now trying to walk back those commitments by underscoring the frailty of Mexico’s economy. But to use the dreaded “B-word” to describe that economy’s current state is reckless, especially at a time that market pressures are building across emerging economies.

Whatever AMLO might say in the heat of the moment, Mexico’s economy is far from bankrupt. Unlike certain other Latin American economies, it has not gambled away all trust and can still service its public debt pile with relative ease. But it is only 36 years ago that Mexico last defaulted, during the Latin American Debt Crisis of the early eighties.

Thankfully, memories are short, and today Mexico’s economy is in better shape, although growth is weak, poverty and inequality are still rife and the state-owned oil company Pemex still shows no sign of curing its addiction to debt. Inflation, at just under 5%, is a shadow of its former self.

Mexico’s public debt-to-GDP ratio of just under 50% is also relatively modest by today’s standards. But when it comes to debt, everything is relative, especially if you if you borrow in a foreign currency that you don’t control.

That, right now, is the biggest risk for Mexico’s economy. As the dollar rises and the burden of the foreign-currency denominated debt grows in peso terms, more and more of the States’ limited financial resources must be used to service it. Meanwhile, rising Federal Reserve rates are luring investors away from emerging markets and back to the US. These conditions are not dissimilar from those that prevailed on the eve of Mexico’s Tequila Crisis (1994-95), which left a brutal economic hangover in its wake.

Today, investors are still fairly sanguine about the prospects of Mexico’s economy. They barely blinked when AMLO said the economy is bankrupt. But if relations continue to sour between the new president and the country’s central bank, eventually investors will begin to sit up and pay attention. By Don Quijones.

Systematic “Petro-Plunder,” as we’ve come to call it, bedevils Mexico’s energy sector. Read…  Gangs of Oil Thieves Expand Their Business Model  
 

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  36 comments for “President-Elect of Mexico’s Bombshell: Economy in “Situation of Bankruptcy”

  1. Sep 24, 2018 at 4:03 pm

    Any ideas how he justifies using the term “bankrupt”?

    • Harrold
      Sep 24, 2018 at 4:32 pm

      Perhaps AMLO has seen the real books?

    • Crysangle
      Sep 24, 2018 at 7:08 pm

      In the interview I just watched he says he used the term because ” now they have had 30 yrs without economic expansion , or did you not notice ? ” @ Half way mark at

      https://m.youtube.com/watch?v=IOAjv5hSa_A

      which gives the gist of the way he is speaking. After crossing the central bank he is now removing security detail from himself, as well as ex-presidents, to show how serious he is about cutting costs (I think that could be called totally comitted to the outcome?)

      US has a similar problem

      “It is possible that because of the country’s bankruptcy, we are not able to do everything it needs. Still, it is clear that we are able to keep the promises made during the campaign,” Obrador said at a meeting with his supporters.

      https://voiceofpeopletoday.com/mexican-president-declares-country-bankrupt/

    • Crysangle
      Sep 24, 2018 at 10:29 pm

      Ed kindly corrected the name in last paragraph, but I linked it specifically because they used the name of another president for some reason, still written that way in the link. No worries, was just something very slightly amusing.

  2. AC_Doctor
    Sep 24, 2018 at 4:13 pm

    Bring on a silver PESO/ REAL MONEY and watch Mexico’s economy flourish. They are one of the world biggest silver miners…

    • MC01
      Sep 25, 2018 at 3:48 am

      And how is that going to take care of labor issues? Drug lords running amok? Pervasive corruption? Pemex chemical plants with five/six times as many people as they need to operate on payroll? Chronically deficient infrastructures? Serious border issues with Guatemala? Dr Wagner Jr losing his mask to a (not really good) nobody?

      In all honesty using silver coins as a ready-made remedy sounds a whole lot like Nicolas Maduro trying to solve his countries’ issues by ordering toy stores to sell Barbie dolls at $2 each and handing out Hugo Chavez action figures.

  3. ISMAR
    Sep 24, 2018 at 5:51 pm

    All western country are bankrupt. Banksters know it. They know the time left titanic. Debt bomb is near. 💣war is coming. Thanks à Goldman boys and girls.

  4. Trinacria
    Sep 24, 2018 at 6:06 pm

    “War is coming”….makes Lord of the Rings look tame. I’m not a vengeful person, but I do hope there is a special place in hell (extra hot!) for these evil bankers/wall street types and politicians who bow to them. I am in my early 60’s, happily married for 36 years thus far as my wife and I lead a simple life..and, I know everyone says it, but I am nevertheless amazed how fast the time has gone. So, I wouldn’t want to have done HALF the harm these folks have brought,and then find myself on my death bed facing my demise, as life is really short!!! My good old dad used to say in Italian: “do good things and forget about it as your reward is not of this world…but do bad things and you never forget and carry heavy burden of the guilt”…this is a loose translation as it rhymes in beautiful Italian! Salute!!!

    • Sep 24, 2018 at 6:50 pm

      Dante had something to say about this too,when he put the fraudsters, manipulators , grafters , and traitors in the deepest parts of the Inferno! But Dante sparked a Renaissance , which we desperately need today, and the beginning of that Renaissance would be for the US to join with Italy, among many other nations, in joining with China in the One Belt One Road “New Silk Road” project, and set up a New Bretton Woods financial system to finance these long term infrastructure projects while putting the fake speculative debt into bankruptcy , as economist and statesman Lyndon LaRouche has long urged, and essentially sending the speculators to hell!

      • d
        Sep 24, 2018 at 10:57 pm

        It is not possible to do a you suggest whilst china continually cheats.

        That is the root problem.

        Nothing can, or will be, resolved, until, china stops cheating, and enabling others to use its facilities to cheat, or china is stopped, from further cheating.

        If that takes war, then war, is what will happen.

        The same situation existed with the Kaiser. His administration would not listed, to the glee of france, which continually goaded him, this caused what became WW 1, a war france wanted, with and ending, france did not want.

        History rhymes/repeats. As the majority do not study and learn from “real history” they are bound to repeat the mistakes of the past.

        • RagnarD
          Sep 25, 2018 at 3:23 pm

          True, China cheats. But what is one of their main devices for cheating?
          The readily printed USD. Put a hard currency back in the global economic equation and I think it becomes a lot harder to “cheat”.

          But who is going to champion such a thing today?

          Btw is printing your own fiat global reserve currency not the definition of cheating?

      • A. Human
        Sep 25, 2018 at 9:10 am

        Here! Here! Finally, sane solutions.

        Thanks Gerald Belsky!

        USA should join the New Silk Road project ASAP!

      • Frank
        Sep 25, 2018 at 8:55 pm

        Lyndon LaRouche? Are you kidding?

  5. Fernando
    Sep 24, 2018 at 6:23 pm

    I have said it before and some here have laughed at me. Mexico is not a functional country! In it’s current state it is a series of regional local government/Mafia association, with almost no direct connection to the central government. They are not sending tax collections back to the federal government. The president is kept in place and untouched to give the illusion of a functional country…the rich have moved to San Antonio, Houston, etc…I know what I am talking about cause I know several wealthy Mexicans who have left and they all say the same.
    Only a dictator or invasion by US forces will correct this!!! Is not going to get better on its own, is too far gone!

    • Crysangle
      Sep 24, 2018 at 7:42 pm
      • Maximus Minimus
        Sep 24, 2018 at 9:10 pm

        While this song might have nothing to do with history, San Blas used to be the port city from which the Spanish empire launched many exploratory expeditions and establish settlements along the west coast all the way to Vancouver Island, which was called Island of Quadra and Vancouver. Many other Spanish names remain. How far Mexico has fallen.

        • Crysangle
          Sep 24, 2018 at 9:30 pm

          The song is folk history based on a true story of a bride to be who was to marry when her fiance returned from a fishing expedition. The boat was lost and he was not found, she waited the next forty years (I think) at the quayside. Latino culture has a special place for deep sentiment and melancholy, as well as loyalty.

    • RD Blakeslee
      Sep 25, 2018 at 10:31 am

      Right on, Fernando – and it’s a lesson for ostensibly civilized countries that increasingly abandon civil behavior in favor of street thuggery.

  6. Fernando
    Sep 24, 2018 at 6:25 pm

    Also, I been in Mexico many times and live ten miles from the border!

    • Bill from Australia
      Sep 24, 2018 at 7:33 pm

      Only a dictator or an invasion by the U.S.A forces will correct !!!. This is just what need another Afganistan,Iraq etc,more WAR,cant people think beyond violence (military intervention) do you never learn. If the U.S.A.exported peace and consider the historical/moral/geographical situations this would show real leadership .In calling for military intervention that,s easy when you give but less so when hunkered down while peace is delivered from 30000 feet

      • George McDuffee
        Sep 24, 2018 at 10:01 pm

        A new Marshall plan! Much cheaper than war!

      • Fernando
        Sep 25, 2018 at 3:50 am

        Why would you even compared Mexico to any other part of the world? I’m am actually ex-military officer. Mexico would be a piece of cake…

        • sierra7
          Sep 26, 2018 at 10:50 am

          The Mexican people will greet American military with….”….candies and flowers”…..
          Oh, wait………

  7. ewmayer
    Sep 24, 2018 at 6:59 pm

    LOL, imagine the hue and cry that would have a arisen had a certain recent US president insisted on similar total-compensation restrictions on execs at bailed-out US banks. (To say nothing of actually prosecuting the leaders of the TBTF fraud cartels.)

    • RagnarD
      Sep 25, 2018 at 3:34 pm

      True, China cheats. But what is one of their main devices for cheating?
      The readily printed USD. Put a hard currency back in the global economic equation and I think it becomes a lot harder to “cheat”.

      But who is going to champion such a thing today?

      Btw is printing your own fiat global reserve currency not the definition of cheating?

  8. Javert Chip
    Sep 24, 2018 at 9:29 pm

    I’m not lobbying for high-paid Bank of Mexico employees, but if you think you have a problem now, wait until all the technical expertise walks out the door and into private industry (within Mexico or elsewhere).

    Then you put Pedro the goat-herder in charge of monetary policy and see what you get.

    Unclear what the solution is.

    • Paulo
      Sep 24, 2018 at 9:58 pm

      Start with land reform. Then, an enforceable minimum wage. One thing Mexico did very well was not allowing foreigners to buy waterfront property. Smart. Sure, they have shyster lawyers facilitating other land purchases but not too many lock up their wealth in such a situation. When you have to employ caretaker/guards to keep your property when you’re not around…..what’s next security systems and doorbell cameras for homeowners? Ohh.

      • Mean Chicken
        Sep 26, 2018 at 6:57 pm

        The waterfront owners will still demand a bailout, just like an overbuilt flood plain or historic swamp property owner.

  9. Hugs
    Sep 25, 2018 at 5:06 am

    The implications are the President elect is going to push out foreign financial interests. Who believes Mexican Central Bank executives live on $20k a year?

    About the salary cut, 100,000 pesos could be turned into 100,000 Pesos if President Obrador follows president Trump’s lead. My meaning is that the Mexican Peso could revalue much stronger if Mexico is modernized. Mexico could be wealthier than Texas and California. One peso equal to one dollar FX. MMGA.

  10. Sep 25, 2018 at 7:47 am

    Lowering the salary of gov’t workers is exactly wrong. It doesn’t save a meaningful amount of money, and it gives the officials more motivation to seek bribes and “campaign contributions”. When officials are paid lavishly, bribes are less attractive.

    • MC01
      Sep 25, 2018 at 9:07 am

      Cutting the top salaries paid by the government is very useful… from a political point of view.

      Yes, you save peanuts, if anything after litigation costs and inflation adjustments are factored in, but saving money is not the point.
      The point is to show voters you are doing something while at the same time avoiding alienating a large number of potential voters in form of the low level governement/SOE employees that should be fired if any real saving is to be achieved: you never hear Mexican politicians saying “The Pemex chemical plants in the State of Veracruz employ 2,500/3,000 workers each while exactly the same plant by capacity and technology level in China, Spain or Turkey employs 500 workers. That situation will change very soon”.

      Lopez Obrador can promise to build all the new “modern and efficient” oil refineries and LNG terminals he wants, but until something is done about the unbelievable levels of inefficiency Pemex has at all levels his promise sounds as nothing more as a nod to the engineering firms north of the Rio Grande that will get to build those oil refineries and LNG terminals and the “foreign partners” that will effectively run them, of course in return for a “fair” price.

    • MooMoo7665
      Sep 26, 2018 at 2:46 am

      …unless you want MOOOOAAARRR!

      more
      more more

  11. Ambrose Bierce
    Sep 25, 2018 at 10:03 am

    So can we do this with our central bank?

  12. mlopez
    Sep 25, 2018 at 2:48 pm

    We could use more of that spirit over here.

  13. timbers
    Sep 25, 2018 at 8:54 pm

    The solution to Mexico’s problem is simple: it must completely de-dollarize. Only them can it reclaim its sovereignty and enact sovereign policy for its own benefit. The issuance of a sovereign national currency is rudimentary to all nation states.

  14. Micky9finger
    Sep 26, 2018 at 1:23 pm

    The first issue is to stop borrowing in dollars or other foreign currency. Hence you only have to pay back in your own currency, which as a sovereign you cannot run out of.
    Readers might recognize MMT raising it’s predictable head in a discussion of deficits and debt denominated in foreign currency.

Comments are closed.