“I want these f**kers to collapse and their CEOs thrown into a Mexican jail for having borrowed in dollars. I want shareholders and bondholders to pay the price, not the people. Let them eat their dollar-bonds.”
By Nick Corbishley, for WOLF STREET:
Mexico’s economy, like just about every national economy on the planet, is going through the grinder. Its currency has lost 26% of its value against the dollar in little over two months. In the past week alone, it tumbled 5.7%. One of its most important exports, oil, is trading at historic lows. Its state-owned oil company Pemex has been slashed to junk. Other key commodities are also plunging in value. Most of its car assembly plants are closed and remittance payments from migrant workers in the U.S., another major source of income, are falling as many of those workers lose their jobs.
Yet as the economy grinds to a halt and Covid-19 cases rise, something strange is happening. Mexico’s president, Andrés Manuel Lopez Obrador (AMLO for short), refuses to use Mexico’s limited fiscal firepower to bail out the country’s biggest companies, banks and investors, many of which have only themselves to blame for the predicament they’re in. And that is a definite no-no.
So the Bank of Mexico, known locally as Banxico, stepped into the breech last week, unleashing a $31 billion bailout package — $31 billion in USD of Banxico’s scarce dollar exchange reserves. In addition, it slashed the benchmark interest rate by 50 points to 6.0%. The interest rate had been kept high to keep the peso from plunging further.
One of the pretexts Banxico’s governor, Alejandro Díaz de Léon, cited to justify the bailout package was that foreign investors had pulled some €10 billion worth of funds out of Mexico’s debt markets since the virus crisis began. In other words, foreign investors that had bought the bonds, largely U.S.-denominated, of Mexican companies that earn most of their money in pesos were now getting cold feet after those bonds had plunged in value. Once again, capital is fleeing northward.
Last night, I proposed this unfolding saga as a possible article topic to Wolf. The response I got was an expletive-riddled, heavily capitalized tirade that took even me by surprise, and I’ve been working with Wolf for seven years. Here’s the sublime rant in all its glory:
“Why the heck did these Mexican companies borrow in dollars if they sell most of their product in pesos? Every single company that borrows in dollars and sells in pesos should be allowed to go bankrupt. They borrowed in dollars because it was a lot cheaper than borrowing in pesos, and they all know they take a HUGE risk every time they do it, and it’s the same frigging thing at every crisis. They can’t service and roll over their dollar debts. WHEN WILL COMPANIES THAT DO THIS FINALLY BE ALLOWED TO GO BANKRUPT?
“I’m sick of this. It’s always the same. And shareholders and bondholders always get bailed out. I want these f**kers to collapse and their CEOs thrown into a Mexican jail for having borrowed in dollars. I want the bondholders to pay the price, not the people. WHY THE F**K DID THEY LEND DOLLARS TO THESE MEXICAN COMPANIES THAT SELL IN PESOS???? GREED!! Let them eat their dollar-bonds.”
Mexican corporations with unpayable dollar-denominated debt and the investors that bought that debt are not the only ones being rescued by this bailout package. Another predictable beneficiary is Mexico’s banking sector, which mainly consists of subsidiaries of foreign behemoths like BBVA, Citi, Santander, Scotiabank and HSBC. In classic QE-fashion, Banxico is now offering to repurchase securities from them, at longer terms than those of regular open market operations. To take those securities off the banks’ balance sheets Banxico, will pay 1.02 times the average overnight interbank interest rate during the term of the transaction.
Taking a leaf out of the Fed’s book, Banxico has also widened the eligibility of debt securities for its emergency liquidity facility to include securities rated BB+ (the first rung of junk grade). Those non-investment grade securities can also now be used as collateral for foreign exchange hedges settled by differences in MXN, and for USD credit auctions.
This mini-QE program will provide Mexican banks with 100 billion pesos ($4 billion) of extra liquidity, Banxico says. But that amount can be expanded at any time. There’s one condition: the banks must use at least some of their newfound liquidity to lend to companies that are rated at least “BB+”. These probably include some of the same companies that are about to have their unpayable dollar-denominated debt bought up by the central bank. In total, Banxico has pledged to splash out 100 billion pesos (another $4 billion) on corporate debt, though that amount may also be expanded, “depending on the conditions prevailing in financial markets.”
To lend the bailout package the flimsiest veneer of fairness and equity, Banxico did what most other central banks have done over the past few weeks. It pledged to provide “resources” to banking institutions so that they can channel credit to micro, small and medium-sized companies and to individuals affected by the pandemic. But as we’ve already seen in many countries, including the U.S. and the UK, it’s up to the banks themselves whether they choose to lend that money out. Many of them don’t…
As for the size of Mexico’s bailout, $31 billion is a drop in the ocean compared to the amount of money the central banks of richer economies have splurged in their respective bailouts of big banks, hedge funds, private equity funds, REITs and corporations. It’s the equivalent of just 3.3% of Mexico’s 2019 GDP. But the bailout is in USD, and it’s the equivalent of almost a fifth of Mexico’s total foreign exchange reserves.
It’s unlikely to be the last bailout. But the next time round, Banxico could find itself on collision course with AMLO, a vocal critic of the last mega-bailout of Mexico’s banks, in 1995, which Mexico’s taxpayers are still paying off to this day. Last week, while acknowledging Banxico’s so-called “independence”, AMLO did appear to fire off an ominous warning shot by reminding Díaz de Léon that “Mexico’s currency reserves belong to the nation, not the Bank of Mexico.”
To what extent this amounts to political theater, purely for the consumption of AMLO’s populist base, it is too early to tell. But as Wolf says, if AMLO’s opposition to the bailout is genuine, “he may be onto something.” By Nick Corbishley, for WOLF STREET.
Due to “the interconnectedness of the financial system” fund gatings can trigger “contagion risk” with “the potential to become a systemic issue,” warns Fitch. Read… Market Mayhem Meets Liquidity Mismatch: “At Least” 76 Mutual Funds in Europe Were “Gated” in March
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