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A Retrospective on the Mexican Bailout
By Ian Vásquez
Introduction
According to the conventional view, the International Monetary Fund's bailout of Mexico in 1995 was a success because it restored confidence in the collapsing peso, led to a quick economic recovery, and possibly stemmed the outbreak of a global systemic financial crisis. The bailout, moreover, helped keep Mexico on a marketoriented track. Proponents of those views rarely mention the high costs of the IMF's intervention to ordinary Mexicans, and they downplay the cost—namely in the form of moral hazard—to the world economy. More importantly, policymakers have never seriously considered market-oriented alternatives to official bailouts in Mexico or elsewhere, yet the evidence strongly suggests that market solutions offer greater benefits and lower costs.
Mexico's relationship with the IMF is especially important because the country seems to influence the lending agency almost as much as the agency influences Mexico. One need only recall how Mexico's 1982 announcement that it could not service its foreign debt set off that decade's Third World debt crisis and turned the Fund into a debt-management agency. Although the era of officially led bailouts began at that time, the era of massive bailouts began with the 1994-95 peso crisis, also a transforming event for the IMF. (No doubt the disproportionate influence that Mexico exerts on the world, particularly on the developing world, is largely due to its size and proximity to the United States.)
A proper evaluation of the Mexico-IMF relationship, then, should take into account the experience of the 1980s. For it was in that decade that the flaws of the IMF-led approach began to appear. During that time, the Fund's emergency credit was intended to avert an international financial crisis (the largest U.S. banks had made sovereign loans in excess of their capital) and provide breathing room for Mexico and other indebted countries to get their finances in order. As the decade wore on, the Fund increasingly relied on loan conditionality in an effort to promote policy change. In practice, the IMF's role as creditor and third-party negotiator created disincentives for Mexico and its private-sector creditors to agree on a debt workout, thus actually delaying reform. Peter Lindert (1990: 250-51) described that outcome as a "three-party stalemate" and Sebastian Edwards (1989: 39) referred to the IMF as "participating in a big charade" because of the agency's continued lending to countries that had a low probability of achieving balance-of-payments viability.
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