return to Current Event page

return to Homework page

Current Event: Mexico's International payment and exchange

Lead Article:
international payment and exchange

Support Article #1:
Mexico: Finance

Support Article #2:
Mexico: Trade

Support Article #3:

return to the top of the page


Current Event:

"International payment and exchange" Encyclopædia Britannica Online. <> [Accessed November 6 2001].

Mexico's International Finance

Evolving communities, such as Mexico, commonly receive loans from more developed countries to help the uprising and revolution in their society. In the 1970s, Mexican imports greatly increased,which created extensive debts and huge problems.

Due to the wide variations in the price of oil, Mexico found itself having to borrow money from more developed countries in order to finance its economic and social growth. By borrowing money when petroleum prices were high, Mexico could not repay the more than $800,000,000,000 in loans when the price of oil dropped. This affected many industries including, but not limited to, the financial backbone of the country- banks.

The two types of banks in Mexico are governmental financial institutions and private banks. The Bank of Mexico, which was private, single-handedly had the right to issue bank notes, enforce credit controls, and sell gold to the public. There are other state financial institutions, such as the National Development Bank. The National Development Bank was one of the first ""financial institutions through which foreign funds were channeled into industrial development projects." Without its partner to the north, the United States, the country of Mexico would probably be bankrupt.

We chose this article because it explains in detail the economical problems that occurred and the issues that still exist in Mexico.

The central issues in this article are about financial reform in Mexico and the problems debt caused for the country due to the fluctuation in oil prices.

The underlying issues in this article are the lack in resources, other than petroleum, and poor management in the banking system.

The main regions this article is referring to is Mexico and Brazil. Both are developing countries that needed to borrow resources in order to increase agriculture and population.


  1. Do you think Mexico could have setup a different banking structure to encourage Mexican citizens to have more confidence in their country's banking system? If so, what?
  2. Why do you think that the increase and decrease of petroleum prices had such an affect on Mexico's economy?
  3. How can Mexico become less reliant on the U.S. to finance their economy with imports and financial aid? Explain.
  4. What is the difference between governmental financial institutions and private banks?
  5. Do you think there is any way Mexico can become less dependarnt on petroleum as a major resource? Why or why not?

Support links:

Mexico: Finance
Mexico: Trade
Financial Reform

return to the top of the page


 "international payment and exchange" Encyclopædia Britannica Online. <> [Accessed November 6 2001].

Developing nations have traditionally borrowed from the developed nations to support their economies. In the 1970s such borrowing became quite heavy among certain developing countries, and their external debt expanded at a very rapid, unsustainable rate. The result was an international financial crisis. Countries such as Mexico and Brazil declared that they could not keep up with the schedule of interest and principal payments, causing severe reactions in the financial world. Cooperating with creditor nations and the IMF, these countries were able to reschedule their debts--that is, delay payments to remove financial pressure. But the underlying problem remained--developing countries were saddled with staggering debts that totaled more than $800,000,000,000 by the mid-1980s. For the less-developed countries as a whole (excluding the major oil exporters), debt service payments were claiming more than 20 percent of their total export earnings.

The large debts created huge problems for the developing countries and for the banks that faced the risk of substantial losses on their loan portfolios. Such debts increased the difficulty of finding funds to finance development. In addition, the need to acquire foreign currencies to service the debt contributed to a rapid depreciation of the currencies and to rapid inflation in Mexico, Brazil, and a number of other developing nations.

The wide fluctuations in the price of oil were one of the factors contributing to the debt problem. When the price of oil rose rapidly in the 1970s, most countries felt unable to reduce their oil consumption quickly. In order to pay for expensive oil imports, many went deeply into debt. They borrowed to finance current consumption--something that could not go on indefinitely. As a major oil importer, Brazil was one of the nations adversely affected by rising oil prices.

Paradoxically, however, the oil-importing countries were not the only ones to borrow more when the price of oil rose rapidly. Some of the oil exporters--such as Mexico--also contracted large new debts. They thought that the price of oil would move continually upward, at least for the foreseeable future. They therefore felt safe in borrowing large amounts, expecting that rapidly increasing oil revenues would provide the funds to service their debts. The price of oil drifted downward, however, making payments much more difficult.

The debt reschedulings, and the accompanying policies of demand restraint, were built on the premise that a few years of tough adjustment would be sufficient to get out of such crises and to provide the basis for renewed, vigorous growth. To the contrary, however, some authorities believed that huge foreign debts would act as a continuing drag on growth and could have catastrophic results.

return to the top of the page 


"Mexico" Encyclopædia Britannica Online. <> [Accessed November 6 2001].



Mexico accumulated more than two-thirds of its foreign debt after the mid-1970s, largely in conjunction with the decline in international prices for petroleum. The country had to renegotiate its obligations to foreign lenders in the 1980s in order to meet debt service payments, and additional loans were secured to pay interest on the debt as well as to restructure payments. Many of the nation's most basic economic dilemmas stemmed from the foreign debt problem. To solve this problem the government embarked upon an austerity program, which included limiting federal spending and controlling prices and wages.

As a result of internal financial problems, there was a major outflow of capital to money markets in other countries, especially the United States. A general lack of confidence in the government's ability to overcome the debt problem stymied economic recovery, and foreign investment, except in maquiladora operations, was drastically reduced.

Until 1982 Mexico had a dual banking structure consisting of governmental financial institutions and private banks that were owned by commercial and industrial groups. The private banking sector was nationalized in an effort to reduce the perceived manipulation and exploitation of the financial markets by private capital. The Bank of Mexico has the sole right to issue bank notes; it also enforces credit controls, fixes reserve requirements, and sells gold to the public. There are other state financial institutions, the most important being the National Development Bank. It is one of the primary financial institutions through which foreign funds are channeled into industrial development projects.

The nation's stock exchange plays only a minor role in providing capital. Most funds are secured through government bonds or bank securities.


return to the top of the page


"Mexico" Encyclopædia Britannica Online. <> [Accessed November 6 2001].



Mexican imports increased rapidly in the 1970s, especially capital goods and agricultural products. The value of exports during this time also increased substantially because of high petroleum prices on the world market. Since the early 1980s, however, the value of oil exports has been substantially reduced.

The United States is Mexico's major trading partner. Almost two-thirds of all exports go to the United States, mainly in the form of petroleum, while more than two-thirds of all imports are from the United States.


Because of its physical diversity and developing economy, Mexico has had a difficult time creating an integrated transportation network. It was one of the first countries in Latin America to promote railway development, but the extensive state-owned railway system remains inefficient. Major rail routes extend outward from Mexico City northwestward along the Pacific coast to Mexicali, northward through the Central Plateau to El Paso and Laredo, Texas, eastward via the Gulf Coastal Plain to the Yucatán Peninsula, and southeastward to Oaxaca. Rail traffic, for both passengers and freight, is slow and unreliable.

As a result, highways are the major mode of transporting passengers and goods. Cross-country trucking accounts for most freight movement within the nation, and interstate buses carry most of the passengers. While they have been improved tremendously over the last two decades, Mexico's highways are barely adequate to serve the national need. As with rails, all major roads lead to Mexico City. Four major two-lane highways link northern border cities to the capital. Similar highways connect the Yucatán Peninsula and the Guatemalan border with the Mesa Central. The 1,250-mile Pan-American Highway runs from Ciudad Cuauhtémoc, on the border with Guatemala, to Nuevo Laredo, on the border with the United States, passing through Mexico City. Several parts of the country lack good rail and road connections, especially from east to west across northern Mexico. In addition, away from the main highways there are few feeder roads.

Air travel has become a major mode of transportation within Mexico. Largely in response to the needs of tourism, new airports have been built throughout the nation. Two national airlines, Aeroméxico and Mexicana, serve all tourist locations and medium-sized urban centres within the country as well as many international destinations.

return to the top of the page

Source: Presidents & Prime Ministers, Nov/Dec95, Vol. 4 Issue 5, p25, 2p.


The Inter-American Development Bank (IDB) has announced the approval of two loans to Mexico totaling $1.25 billion to support the restructuring of Mexico's financial system and to strengthen social services for the lowest income groups. One loan, for $750 million, will finance measures to increase confidence in Mexico's financial system, reducing short-term financial distress and increasing the soundness and transparency of the institutional and regulatory framework in the medium term. The second loan, for $500 million, will strengthen social services for those sectors of society most affected by Mexico's recent financial crisis. It will improve and expand preschool, primary, and secondary education for the poor, strengthen nutrition and health services, and provide job training and employment opportunities.

The total of the two loans is greater than the record $1.062 billion in loans approved by the IDB for Mexico in 1994. The World Bank is also contributing financing for both programs.

The financial reform program includes undertaking an evaluation of the banking system, through diagnostic studies and accelerated on-site inspections, and the restructuring of problem banks with the assistance of investment bankers. Accounting standards will be reformed to achieve consistency with international standards, and the regulatory. framework will be improved, particularly with regard to facilitating voluntary debt restructuring. Studies will be undertaken on obstacles to securitization and secured lending and on the need for a revised system of deposit protection. In addition, the consistency of development finance operations will be reviewed, and appropriate actions will be taken to increase discipline in the provision of resources.

The resources are intended to serve as a catalyst to restore the confidence of private investors and depositors in the safety and soundness of the financial sector, thereby mobilizing additional domestic and foreign capital that will contribute to economic growth. The climate for generating domestic savings will be improved.


Copyright of Presidents & Prime Ministers is the property of Presidents & Prime Ministers and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.


return to Current Event page

return to the top of the page

return to Homework page