Volume 43, Number 169,
April-June 2012
The 1980's: 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 capitalism 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 were indexed to the former as a result of their deregulation.

To deregulate bank rates, the requirement for the government involved dismantling the bank use and reserve requirement system ("sistema de canalización y reserva obligatoria o encaje legal")used up until that point, as the means of financing productive activities; in 1987 these activities became totally independent from this System funding (Table 3). The following year the government could take the definitive step toward deregulating bank rates, eliminating every rule for the subscription of banker's 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 the Mexican "encaje legal" System.

On this basis, in the 1989 reform of the legal framework for the financial market, the government announced the release for all interest rates by fully extending the regime that ruled the banker's acceptances the preceding year, to the all banker's financial instruments. These legal amendments also determined that, from that point on, the Banco de México would no longer set any rate for banker's financial 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 bonds.30 In practice, as banks indexed their instruments’ interest on these rates, this release ended up being sui generis; although the rates on government bonds were determined automatically on the basis of the supply and demand of government financial 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 account used by the Mexican government to save the resources needed to pay the 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 1970's, 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.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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