Documentary «Privatization Ex Post: The President's Decision» | Carlos Salinas and Ernesto Zedillo

The 1980s were a difficult economic period for Mexico, marked by a severe crisis in 1982, zero growth for six years, and hyperinflation. The nationalized banking system was not growing, and state-owned enterprises were a major drain on public finances. This led to a consensus that the existing economic model was unsustainable and that a new, market-oriented approach was needed, including the privatization of state-owned entities.

To reduce inflation and prepare the economy for privatization, the government implemented a stabilization program known as 'The Pact,' which indexed the economy and froze public prices. Miguel de la Madrid's administration significantly increased foreign reserves, providing a buffer for economic reforms. The renegotiation of Mexico's external debt, led by Pedro Aspe, reduced the debt burden and encouraged capital repatriation and foreign investment, setting the stage for renewed economic growth and optimism.

In 1990, the decision was made to privatize 18 nationalized banks. The process was swift, with all banks sold within 13 months, generating significant revenue for the government. The sale prices were high, averaging three times their book value. Key rules included prohibiting majority foreign ownership in the largest banks and preventing former owners from repurchasing their old institutions. The process, however, was criticized for its speed and for prioritizing the highest bidder, neglecting due diligence regarding the financial health of the banks and their future management.

The rapid and high-priced sale of banks, often through leveraged purchases where capital was sourced through cross-lending between banks, introduced significant systemic risk. Many buyers lacked banking expertise, and some used their positions to grant credits to their own companies, leading to a boom in risky lending. The lack of transparency regarding loan portfolios during the sale further exacerbated these issues, as buyers were unable to fully assess the true value of the assets.

Despite initial economic growth, Mexico experienced a dangerous imbalance with a high current account deficit and an appreciating exchange rate. The influx of foreign capital fueled a credit boom, with banks extending risky loans, particularly in mortgages and consumer credit. This coincided with increasing political instability, including the Zapatista uprising and the assassination of presidential candidate Luis Donaldo Colosio, which eroded investor confidence and led to capital flight.

To stem capital flight, the government indexed public debt instruments (Tesobonos) to the dollar, essentially guaranteeing exchange rate stability. However, with rapidly dwindling foreign reserves, the fixed exchange rate became unsustainable. The decision to postpone a necessary currency devaluation until after the presidential transition, coupled with a lack of communication among economic officials, triggered a massive speculative attack against the peso in December 1994, leading to a sharp devaluation and a banking crisis.

Facing national bankruptcy, Mexico sought a large financial rescue package from the US and international institutions. The US, fearing a ripple effect on global markets, provided significant support after initial congressional resistance. The International Monetary Fund (IMF) imposed strict conditions, including extremely high interest rates, which further crippled businesses and individuals, leading to a widespread inability to repay loans and massive bank failures.

The government implemented the FOBAPROA program to rescue the banking system, converting private bank losses into public debt. This involved buying non-performing loans from banks, essentially transferring the risk to taxpayers. Critics argued that this largely benefited bank shareholders and insiders, while the social cost was immense, including job losses and widespread economic hardship. The legality and transparency of some of these transactions were highly questioned, with many irregular and even illegal credits being absorbed by the program.

The conversion of FOBAPROA's liabilities into public debt sparked a heated political debate. An independent audit by Michael Mackey revealed numerous irregularities and illegalities in bank lending practices that contributed to the crisis. While some individuals were held accountable, many high-profile figures escaped punishment. The privatization ultimately led to the foreign ownership of a significant portion of Mexico's banking sector, with concerns that lending decisions are now made based on foreign priorities rather than Mexico's social development.