Now in Lockdown, Mexico’s Economy Slides. Banks & Companies Clamor for Bailout. Government Refuses

All non-essential activities have been suspended for at least a month. But where are the bailouts?

By Nick Corbishley, for WOLF STREET:

Mexico faces its biggest economic storm since the Tequila Crisis in the mid-1990s. Then, the peso lost almost 50% of its value against the dollar in a matter of weeks, wiping out the life savings of much of the country’s middle class and stoking fears that collapsing asset values would push Mexican banks over the edge, taking part of Wall Street with them. In the end, that fate was averted with a bailout and the creation of one of the world’s first ever “bad banks.”

Today, as a whole different kind of crisis — this time a health crisis, global in nature — builds, the peso is once again sinking. In March, it suffered its biggest monthly decline since 2009, though it has since firmed a little. The economy of its biggest trading partner, the United States, has all but ground to a halt. This has major implications not only for Mexico’s exports but also for the remittances that Mexican workers living in the U.S. send back to their families. Last year, remittances from the US and other countries totaled $36 billion.

In some Mexican states, these payments can represent as much as 10% of total revenues, most of which gets spent very quickly in the Mexican economy. Thousands of businesses depend on the funds for capital. But as more and more of Mexico’s migrant workers fall prey to America’s jobs cull, a lot of that money is no longer going to arrive.

“Unemployment in the United States poses a big risk to the Mexican economy”, says José Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth (IDIC). “The remittances have been a key pillar for the economies of many towns, cities and even entire states. Now we are expecting a fall of up to 20% in these funds this year.”

Mexico’s economy already stopped growing last year. Now, it’s beginning to seize up altogether following the government’s declaration on March 30 of a national emergency to tackle Covid-19. All non-essential activities have been suspended for at least a month.

The banks are once again beginning to fret. On Tuesday, Citibanamex sent a letter to clients warning that the economy is in an “state of agony” and in desperate need of “audacious” fiscal measures. Bank of America cautioned that Mexico’s president Andres Manuel Lopez Obrador’s “pro-cyclical measures” will not only deepen the coming depression, they will hasten the downgrading of Mexico’s sovereign debt to junk status.

In part, the banks are talking their own book, hoping to push AMLO into a bailout deal that will serve nobody’s interests but their own and their largest clients’. For the moment, it’s not working.

Most Latin American economies, including the region’s two powerhouses, Brazil and Mexico, have neither the fiscal firepower nor monetary leeway to intervene as aggressively in the economy as, say, the U.S. or most EU countries. To try to stop things from spiraling out of control, the Federal Reserve has announced it is opening swap lines with Mexico and Brazil’s central banks.

There’s also plenty more that AMLO could do to support the economy. Public investment under his administration remains extremely low. So far, his government’s fiscal proposals for combating the slowdown are, pound-for-pound, among the most timid in Latin America, representing just 2% of annual GDP, compared to 3-5% in many other countries in the region and 20-40% in some countries in Europe and North America.

Most of that money will go toward bolstering social welfare programs for the most vulnerable, including the elderly, single mothers and the unemployed. The government will also offer mini-loans of up to 25,000 pesos ($1,000) to a million micro-businesses with interest rates of 6.5%, the same as Bank of Mexico’s benchmark rate. But that won’t happen until the end of April. And as yet no money has been earmarked to help larger businesses ride out the storm. And that is causing major concern.

“Let me emphasize: this is a problem of liquidity, not solvency,” said Carlos Salazar Lomelín, president of the Business Coordination Council (CCE). “Companies both large and small were operating perfectly well in February, meeting all of their fiscal obligations. But suddenly, from one day to the next, they had to close up shop… [due to] a situation that was completely beyond their control.”

AMLO says he will not give tax breaks to people or firms. He will not incur public debt that will burden taxpayers for years to come. And he will not create another “FOBAPROA,” in reference to the deposit insurance fund the Zedillo government used to directly bail out many of Mexico’s biggest banks, and indirectly many of the corporations at the height of the Tequila Crisis. It was one of the world’s first (and worst) “bad banks.”

Lawrence Kudlow, who was then economics editor of the conservative National Review magazine, added some spice to the Tequila Crisis in sworn testimony to the US Congress: “It is a bailout of U.S. banks, brokerage firms, pension funds and insurance companies who own short-term Mexican debt, including roughly $16 billion of dollar-denominated tesobonos and about $2.5 billion of peso-denominated Treasury bills (cetes).”

And it cost the Mexican people, who ended up having to pay for it via newly issued debt, an incalculable sum of money and hardship.

Given all that has happened since Zedillo signed along the dotted line, AMLO for now refuses to kowtow to the banks and businesses’ latest request for another blank check to be paid for by the Mexican people. But this crisis is vastly different from the last one. Obviously, these businesses cannot be blamed for what is happening to them. And many need support during the lockdown. In the end, AMLO will probably end up helping them out. But it may be on his — not their — terms. By Nick Corbishley, for WOLF STREET.

Never before have so many property funds shut the doors on so many property investors. Read… Lockdown Hits UK Commercial Real Estate, Retail Landlords & Their Investors: Most Property Mutual Funds Suddenly “Gated”

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  34 comments for “Now in Lockdown, Mexico’s Economy Slides. Banks & Companies Clamor for Bailout. Government Refuses

  1. Iamafan says:

    We’re doing a lot better /sarc

    As of yesterday 4/7 the Treasury had $750 billion in cash.
    See April 7 report here:

    From 4/8 to 9 (or the next 2 days) they will add $369 billion LESS redeemed maturing securities in cash.
    Next week, they’ll have another $512 billion GROSS.
    So they will have more than a Trillion bucks to fund all the programs they need. You can leverage that 10:1 in a Fed SPV for real impressive results.

    Can’t Mexicans just cross the border for a fiesta of some sort?

  2. Eduardo Corrocio says:

    O Caramba!

  3. char says:

    No mentioning of the coke trade.It also but billions in the Mexican economy and my guess is that a) demand has collapsed and b) moving it is much harder.

    • Tim says:

      I had to re-read you name – for a moment Could have sworn it was ‘charlie’


    • KGC says:

      Narcotics and booze always prosper in a down economy. People will buy those when they can’t feed the kids.

      • char says:

        We are in a closed economy which is not the same as a down economy. Never done drugs but the reputation of coke is not like it is the ideal drug to use alone while you have nothing to do.

        • KGC says:

          Very few people are actually “alone”. Hospitals are already questioning the possibility of a baby boom in 9 months. Coke is an ideal drug in those instances.

  4. R U Kiddin says:

    In my humble opinion, Obrador will handle this in a way that will not work very well. His handling of the Airport was sort of a “Well what do you think?” with a non-active reaction to that much smaller crisis with an ineffective solution. His handling of the Sinoloa, et al. drug war has been a continuing tragedy. After all isn’t Obrador one who desires change, but has only a left leaning idea for how to do any change. Perhaps his ability for change and solutions can only be brought out by the severest of conditions. Obrador is a weak leader who will be unable to punch at his weight level.

  5. Brant Lee says:

    I wonder if illegal border crossings have slowed? Perhaps soon the crowds will push down the fences including people from Central and South America busting through Mexico’s southern border. The situation will go from terrible to pathetic in all countries South.

  6. Iamafan says:

    Do they have the Fed? No, then sorry.

  7. Phoenix_Ikki says:

    “Most of that money will go toward bolstering social welfare programs for the most vulnerable, including the elderly, single mothers and the unemployed. The government will also offer mini-loans of up to 25,000 pesos ($1,000) to a million micro-businesses with interest rates of 6.5%, the same as Bank of Mexico’s benchmark rate. But that won’t happen until the end of April. And as yet no money has been earmarked to help larger businesses ride out the storm. And that is causing major concern.”

    How dare them, trying to take care of the people rather than large corporation. They need to adopt socialism the right way, money for to the top not the other way around. On the contrary, they should just create their own FED and sprinkle a couple T here and there but don’t call it a bailout…then party on Wayne, party on Garth…everything back to normal again.

  8. Jdog says:

    Mexico has a parasitic relationship with the US. It depends on the US for a great deal of its prosperity. If this hits the US as hard as I think it will, Mexico is in for crash.

    • Parasitic? You realize this is an economics blog, don’t you?

      • Rabbs says:

        An “economic blog” would call for an HONEST MONEY SYTEM in the very first sentence of every single article it published.

        • Wolf Richter says:


          Hahahahahaha… If every article starts out with the same sentence, that’s a “broken record.” Only a brain-dead writer would do that. People have said the same honest-money thing for decades. There is zero new about it. It’s the most boring thing anyone can say. People nod off to sleep when they hear it. And it’s just wishful thinking. Not happening. Doesn’t matter how much you or I might want it. It’s just a waste of breath to even think about it, so to speak :-]

        • Every10minutes says:

          I don’t understand you guys, this honest money system already exists and its hearth beats roughly every 10 minutes.

          It’s open source, decentralized, based on honest incentives and highly secure. It’s orange and starts with a B.

    • Jonas Grimm says:

      It’s only parasitic insofar as the US itself is a super-parasite.

  9. KGC says:

    This is an issue of solvency. Businesses around the globe have gutted their emergency funds chasing profits and getting taxed to repay previous bailouts due to a massive lack of fiscal stewardship (starting with Congress and working downwards). This perception that the Gov’t is supposed to “bail out” business has done enormous damage to the world economy by basically rewarding bad management.

    Solvent businesses don’t start screaming for a handout after a couple of down weeks or run from transparency of their accounts. The USA would be better off if it had a bit of Obrador’s memory and fiscal restraint instead of the “let’s just print more funny money” crisis management we’re stuck with.

    There’s no way the US middle class will ever dig out from under the burden of this years “relief”.

  10. Javert Chip says:

    Well, at least he’s stopped running around hugging & kissing everybody. That’s something.

  11. David Hall says:

    Mexico Loses Almost 350,000 Jobs Because of Coronavirus – US News and World Report, 4/8/20

    Mexicans fear looting spree as shops robbed, online messages incite theft – Reuter’s, 3/25/20

  12. neplusultra says:

    There it is. I think you should stick to the Zero Hedge comment section

  13. Carl Thompson says:

    It WAS the fault of businesses. Blaming this on the virus is just a big smoke screen for corruption in government and business.

  14. ToughTimes says:

    This means a lot more potentially illegal Mexicans crossing the border in the near future as their already poor economy might collapse all together. Very depressing news all the way around.

  15. WES says:

    ALMO has a problem! Mexico is broke! So he a little of other people’s money to spend!

    In the long run poor Mexicans will be better served with a higher growing economy in the future if there is less debt burden to carry.

    In the short term poor Mexicans will suffer. Rich Mexicans won’t suffer at all.

    If rich Mexicans get bailed out, then poor Mexican’s suffering will never stop.

    If ALMO is a real socialist, he won’t let the rich rob the poor one more time!

  16. A says:

    Another fun story I’m following.

    Wynn, Sands, and MGM Casinos make about 2/3rds of all their money in Macau (and only 1/3 in Las Vegas). The Chinese Macau governent has essentially ordered the casinos to pay workers and has the veiled threat that if they are “socially irresponsible” and lay off workers that they will take “social irresponsibility” into account when deciding whether to review a casino’s operating license in 2022. China is not bailing them out one penny.

    Meanwhile, in America, all the casinos are we’ll connected Republican donors angling for bailouts from the administration.

    If they get bailouts, the sum total of what will occur is that majority-chinese (by revenue) casino corporations will get US taxpayer funded bailouts to pay Chinese middle-class workers.

  17. Sit23 says:

    Mexico’s big problem is not bailing out the foreigners who own all the corporate debt. Looking after the locals never goes down well with them.

  18. QQQBall says:

    Sorry if I missed it, but oil prices ain’t doing Mexico any good. I didnt see it mentioned in the article.

  19. MC01 says:

    Another government killing the country to save it, eh?

    It’s useless to extend loans at favorable conditions or coming up with wave of stimulus after wave of stimulus if the political will is to keep the country locked down forever. How are businesses going to repay those loans if they won’t have a cashflow ever again? And what is left to stimulate after months or perhaps even years of lockdown?

  20. SteveK9 says:

    Don’t bail them out, and don’t lock them down.

  21. CharlesBooker says:

    Those tens of billion$ sent south from the U.S., is money removed from circulation over and over again through the multiplier effect, and locally not sales-taxed, in the poorer communities where Mexicans and Central Americans live.

    Put a ten percent tax on all wire transfers to specifically benefit the communities where the money transfer offices are located. This could pay for Spanish Hispano dialect language health clinics and food assistance for the community that expects the U.S. and local taxpayers to pay for them, as well as the taxpayer subsidized non-profits like Catholic Charities.

  22. Dave S says:

    It’s good to see a government that isn’t coddling to entrenched special interests immediately with little for the average guy. This seems like the free market response, these economies shouldn’t be shut down. 90+% of deaths are people above 70 with other conditions. Older people should isolate to the extent possible and allow the economies to function. Many small businesses will go bankrupt from this absurdly overblown lockdown, which is a shame. Bailing out large corporations who buy back their own shares or financial engineer like in the US is the 3rd or 4th greatest larceny in American history, but ma and pa are getting $1200 yippie all is well then.

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