The 1980s Mexican Political Economy
Reinterpreted through the Hypothesis of Financialization
Violeta Rodríguez
The Demand for Government Bonds ( ...continuation )

With the last legal definition, together with the sale of government companies, added to the authorities’ determination to avoid resorting to printing more money to finance public activities and with the reduction of said financing,26 the government legally detached monetary and exchange-rate policies from the responsibility which they had assumed in the past to raise funds for development,27 so that the productive process faced the financial restrictions characteristic of the leveraged buy-out stage.28

Measures that created, promoted and made domestic finance
transaction market practices a routine affair

With the restrictive monetary strategy described above, real interest rates for the government bonds increased, a situation that was transferred to rates for deposits and banking instruments, since these are indexed to the former as a result of their deregulation.

To deregulate bank rates, the requirement for the government involved dismantling the bank reserve requirement used up until that point, as the means of financing productive activities; in 1987 these activities became totally independent from this cash reserve requirement (Table 3). The following year the government could take the definitive step toward deregulating bank rates, eliminating every rule for the subscription of bank acceptances and for the granting of third-party guarantees for their commercial transactions29 (Table 4). That was the definitive step, because it implied excluding both types of certificate mentioned, for the first time in forty years, from the rules of obligatory rules for channeling .

On this basis, in the 1989 reform of the legal framework for the financial market, the government announced the release from the bank acceptance regime of the preceding year for all interest rates by fully extending the instruments available for the banks to secure funds. These legal amendments also determined that, from that point on, the Banco de México would no longer set any rate for bank instruments and that the yield rate s for bank deposits at the Banco de México would be established on the basis of the current rates of government-issued securities.30 In practice, as banks indexed their instruments’ interest on these rates, this release ended up being sui generis; although the rates on government securities were determined automatically on the basis of the supply and demand of government instruments, this supply and demand was not defined by the market, as clearly shown in the three preceding sections.

Exchange rate and international reserves policy intended to guarantee
immediate liquid-yield payments on capital investments

Ever since it was first established, the International Reserve has been the savings account used by the Mexican government to give returns on investments in Mexico made in foreign currencies. However, since the financialization process began, two changes have affected how this savings account is managed.31

On the one hand, its main source of financing ceased being loans granted by the IMF for exchange-rate stabilization purposes. Since global financialization began in the early 1970s, this international organization set about reducing these loans, and therefore Mexico had to increasingly resort to funds that it obtained from issuing government bonds for the same stabilization purpose. Also, by adopting a flexible exchange-rate policy, the managers of the aforesaid savings account stopped chasing a fixed value for the local currency, accepting fluctuations in its price in foreign currencies, and in the cost and value of the International Reserve itself.

One effect of these two changes was the drastic rise in said cost, and therefore profits increased from investments made in foreign currencies within the local economy, because the government bonds issued to finance the Reserve were indexed to the domestic interest rates or to the price of oil, and both variables increased in value in real terms, together with the risk premium that these bonds paid, associated with the constantly fluctuating exchange rate (see Figure 6). The other effect was that the government was forced to use increasing amounts of domestic liquid resources32 to pay for this yield, tightening the financial restriction that was already confronting the productive process.

26 Op. cit., 1983: 22

27 Op. cit., 1984: 26-27

28 Palley, 1990: 42-45.

29 Banco de México. Op. cit., 1988: 29.

30 Op. cit., 1989: 32.

31 Rodríguez (2011) presents illustrative statistics and a detailed explanation of the hypothesis set out in this paragraph and in the subsection in general.

32 Derived from the foreign sales of oil and monetary restriction.