Mexico's money woes shake the international financial system
If you owe your bank manager a thousand pounds, you are at his mercy; if you owe him a million pounds, he is at your mercy. —John Maynard Keynes
Many of Keynes' economic theories are today in eclipse, but his shrewd observation on the relationship between bankers and borrowers still rings true. In fact, some of the world's leading financial institutions are painfully learning the accuracy of this aphorism. After having extended $845 billion in loans to debtor nations over the past decade, the bankers now find themselves struggling to keep their borrowers solvent.
Last week, top international moneymen met in New York City, Washington, Paris and Basel to work out an agreement for the repayment of the $80 billion that Mexico owes banks, governments and international institutions. Such action is fast becoming a familiar exercise. During the past year many of the same bankers helped Poland and then Rumania through their credit crises. This time, however, the suddenness of Mexico's near default and the sheer magnitude of its indebtedness have created new worries. Experts feared that the interlocking credit network, on which many of the world's economies depend, might be in danger of crumbling.
As concerns grew about the wobbly state of world banking, federal regulators in the U.S. last week announced plans to broaden their efforts to keep track of banks that make bad loans. Beginning on Sept. 30, every one of the 14,000 federally insured banks in the U.S. will have to make comprehensive reports about their problem loans. Until now, only those banks that were federally chartered, about one-third of all such institutions, had been required to provide the loan information.
The origin of the current international banking troubles goes back to loose lending procedures adopted during the 1970s. Flush with oil revenues from the suddenly wealthy members of the Organization of the Petroleum Exporting Countries, moneymen eagerly sought borrowers so that they could reinvest their petrodeposits. The most obvious clients were developing countries, which needed the money to pay for their higher oil import bills and for modernization projects. Lending officers in three-piece suits prowled the capitals of Third World nations, their attache cases stuffed with loan applications. Bankers confidently told one another, as Citibank Chairman Walter Wriston is fond of saying, "Countries don't go bankrupt." Unlike corporations, nations do not disappear into liquidation if they cannot pay their bills. Moreover, even the poorest country can usually reduce its debts with dollars earned by exporting goods. Suddenly, however, those assumptions are no longer so comforting.