Playing with Fire? Internationalization and Condition of Mexican Banks Prior to The 1982 Debt Crisis

Abstract

Large foreign lending and heavy indebtedness of developing countries are main features of international finance in leading to the debt crisis of the 1980s. The high exposure of the commercial banking sector from industrial countries to external debt in the developing world by the time of the Mexican default in August 1982 is well known. However, although importantly involved in foreign finance and the petrodollar recycling process, the condition of commercial banks from debtor countries themselves has been much less recognized and explored. This paper shows that the health and financial position of the Mexican commercial banking sector significantly deteriorated in the years preceding the debt crisis, and that internationalization was an exit option to domestic fundraising difficulties. Economic and financial analysis of the banks' asset and liability structure demonstrate that banks involved in international business had greater risk levels than those operating only in the domestic market, which puts international banking at the heart of the problem. The paper provides new insights into the domestic and international political economy of a lending-borrowing mechanism that led to what was perhaps the largest global financial crisis since the Great Depression.