The Latin American debt crisis that erupted in 1982 was a dramatic episode in the recent financial history of the world and had long lasting consequences. From those events and their aftermath, emerged an important wave of studies, primarily on sovereign debt, which was the focus of intense debate in economics and political science during the 1980s and 1990s.
The literature on the history of the financial systems of debtor countries, however, has been less abundant. The way the financial globalization of the 1970s worked and how the 1980s crisis unraveled in those economies has been in desperate need of fresh ideas and research. Sebastian Alvarez’s book, Mexican Banks and Foreign Finance: From Internationalization to Financial Crisis, 1973–1982, is a refreshing contribution to this latter topic.
Mexican Banks and Foreign Finance starts with a story of financial globalization, focusing on the insertion of Mexico in the global financial markets of the 1970s. Using the case of Mexico, it explains the process of financial globalization that occurred at that time and gives us an idea of how little we know of this episode in emerging economies in general. The book is based on an in-depth analysis of primary sources in international archives, including the Bank of England, the Bank of International Settlements, the Federal Reserve of New York, the International Monetary Fund, Lloyds, as well as local archival sources in Mexico, such as the historical archive of the private bank Banamex and the archives of Banco de México, the central bank. The research captures well the understanding that international actors had of emerging economies during the period under analysis.
In the 1970s, Mexico experienced two phenomena. First, that country entered financial globalization as a consequence of the global expansion of the Eurodollar. At the same time, it was one of the lucky countries that experienced an oil boom between 1977 and 1982. Chapter 1 of the book describes the growing presence of emerging economies, mainly in Latin America, in the Euromarket. It also explains the evolution of foreign debt in those emerging countries in the 1970s.
Chapter 2 explains the evolution of the Mexican banking system and its internationalization. This chapter is indispensable because it helps the reader to understand the Mexican banking system and of its main institutional actors. Likewise, it allows us to understand the insertion of Mexican banks in international markets. It should be noted that the insertion of Mexican banks into the global financial centers predated the starting point indicated by the book. Still, the book allows us to identify an important turning point in the process, which was surprisingly lacking in the existing literature on the financial history of Latin America.
The creation of an active Eurodollar market was a prelude to Mexico’s over-indebtedness and crisis. The creation of London-based consortium banks in partnership with banks from other countries was necessary to facilitate the insertion of countries like Mexico and its banks into this buoyant debt market. The expansion of branches and agencies of Mexican banks in London and in the United States was another characteristic of this process. Those offices in major financial centers were instrumental to facilitate access to credit for Mexican banks.
According to Alvarez, the rapid increase of Mexico’s indebtedness had three internal triggers: the oil boom that started in 1977, the expansion of public expenditure in the 1970s, and the availability of funds in the international credit markets. Chapter 3 focuses on explaining how this process occurred in Mexico and describes the unstable macroeconomic environment.
Then, the book explains how the combination of excessive foreign indebtedness and macroeconomic instability, such as rising inflation and exchange rate volatility, led to a deterioration in the financial health of the Mexican banks. The book shows growing imbalances between the assets and liabilities of these banks, in particular the increase in short-term liabilities in dollars. Chapters 4 and 5 analyze the interrelation between the expansion of foreign credit to Mexican banks and the subsequent crisis. Using information from international archives, the author reconstructs historical statistics on the financial position of banks, which is novel in studies on this topic. It is not clear when the inflexion point in the risk of banks occurs, but it is a fact that in 1982 they were already in an extremely vulnerable position.
When the Mexican government declared the debt moratorium in August 1982, banks played an important role in the debt negotiation process. This relationship between local banks, international creditors, and the government is discussed in Chapter 6. This is one of the most interesting parts of this book, as it studies the pipeline of sovereign debt negotiations in the 1980s. It also explains that despite the fact that the financial systems of emerging countries such as Argentina, Brazil, and Mexico had a modest participation in interbank markets, they had an outsized effect on their stability.
Days after Mexico declared the debt moratorium in 1982, the government nationalized its private banks. This was a move motivated by political reasons, rather than a consequence of the financial situation of its banks. In the concluding chapter, the author ventures into speculative conclusions about the causes of the Mexican bank expropriation, some of which contradict existing research without much new evidence.
Despite the solid and original academic research in this book, informed readers are left wanting a clearer overarching question. For instance, the story could have been framed around notions of how expectations of financial actors in government and banks contribute to nest a crisis, using a simple version of Robert Shiller’s contributions to the emergence of bubbles and crisis (Irrational Exuberance, Princeton University Press, 2000). A more complex alternative, but not implausible, is a story in which the political economy of the strategic interactions between banks and the government generates a lock-in mechanism that culminates in a crisis, following the analytical narrative of Charles Calomiris and Stephen Haber (Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton University Press, 2015). That is, with a better conceptual framework in this book it would have been easier for the reader to identify the counterfactual of the story.
Another question that remains unanswered is the government’s political economy in terms of its borrowing needs, which was undoubtedly an important driver of the growth of foreign debt. For instance, there were commitments and political pressures on public spending, as well as a vision throughout Latin America that considered that significant government intervention in the economy was a precondition for growth. All of this was compounded by the aggressive strategy by international banks to lend recycled Eurodollars to governments, who perceived them as risk-free loans. This euphoria of international lenders is also superficially discussed.
Overall, the book has a well-crafted narrative that is accessible to most readers. Certainly, it is a scholarly work that is of interest to the broad set of students of financial crises, of the international financial system, and of international business. Moreover, it is a valuable and exciting contribution to the economic and financial history of Latin America.
