The 1980s Mexican Political Economy
Reinterpreted through the Hypothesis of Financialization
Violeta Rodríguez
Monetary Policy and the Expansion of Internal
Public Debt Acquired through the Issue of Securities

The profitability of the aforementioned business moves in the same direction as the debt balance and its interest rate; in the case of internal public debt, the increase in the latter two variables during the 1980s is explained by the restrictive monetary policy.

Offer of Government Bonds

In fact, the economic policy that played the biggest role in promoting the increased offer of securities in Mexico, as well as modernizing the financial system, came in 1977 when Mexican Congress authorized the Banco de México (Mexico's central bank) to issue interest-bearing government bonds (CETES)18 and Petroleum Bonds (PETROBONOS);19 similarly, the government's decision to reconvert this type of title practically its entire debt.20

This was the most powerful driving force because, as an under-developed country without private companies with the capacity and custom of raising funds through the stock market, the Mexican financial market could not feasibly offer securities domestically or internationally other than through government bonds. The only requirement that the government needed to expand their offer, with a guaranteed demand, was to ensure the permanent increase in the rates of return offered by the government securities.

Interest Rates of Government Bonds

The Banco de México took the decision to auction its CETES bonds ever since they were first issuedoffering a fixed amount for them at each auction and allowing the interest rate for that amount to be determined by the demand for the instrument.21 Therefore the government could steer the increase in rates offered by said bonds, by bringing about a situation in which the demand for its bonds was greater than their supply, and this in turn was enabled by implementing the monetary restriction strategy.

That restriction became the systematic feature of the monetary policy in the 1980s, when this policy took on inflation control as its core aim.22 The immediate result of this restrictive strategy, however, did not involve meeting this objective, as this was only achieved toward the end of the 1980s when the process of adjusting official prices to their market levels was completed23 (See Figure 6). That result was the increase of rates paid by the government bonds, precisely because the restrictive policy led to the generation, decreed by the Banco de México, of the banking sector's demand for these titles, in excess of the available supply.

The Demand for Government Bonds

Restricting monetary supply ensured a growing demand for government bonds, and the mechanism most used by the government to achieve this was by reducing the credit limits that banks were authorized to offer, ordering them to acquire government bonds with the deposits over and above said limits (see Table 2).

This form of handling monetary policy was passed into law following the amendment to the Banco de México Act of 1984,24 which included three statutes for Banco de México to increase demand for government bonds and one that was key to ensuring the evolution of financialization to its leveraged buy-out stage. Firstly, money ceased to be issued for the same amount and up to four times the International Reserve. In practice, this reduced the amount of money in circulation and to reduce it, the monetary authority ordered banks to buy government bonds. Secondly, this Reserve was no longer registered at commercial value, to prevent an increase in its peso value and also the automatic expansion of finance limits that derived from devaluations. In practice, to cancel this expansion, the banks had to invest in government bonds an amount equivalent to the increase in the peso value of the dollars they held. Thirdly, internal credit was restricted to the amount established by the Government Board, effectively making the definition of the financing limits a discretional decision for the monetary authority. And finally, Mexico's federal treasury was no longer to be granted debt over one per cent of the consolidated total revenue anticipated in the Federal Revenue Law,25 canceling the possibility for the budget to perform an anti-cyclical role.

18 Op. cit., 1977: 43, and 1979: 65.

19 Op. cit., 1977: 40 and 52.

20 Op. cit., 1979: 64-65.

21 Op. cit., 1985: 26, and 1986: 28, refer to these two years when the government implemented the opposite practice of setting the rate by decree.

22 Op. cit., 1982: 35. Although such measures has already been applied for many years previously, as described in Op. cit., 1978: 28-29, it was not until the 1980s that it was used systematically.

23 Op. cit., 1981: 37, reports that official price adjustments began this year,; Op. cit., 1982: 22, 35-36 and 40, refers to that year, when the government pushed for said adjustment; while Op. cit., 1988: 109, reports that it had finished.

24 Op. cit., 1984: 27.

25 Op. cit., p. 110.