1980s, the top nine US banks were in danger of default caused from the Mexico bank crisis. These top nine US banks stood too lose 50% of their value, should Mexico banks default. Mexico banks were unable to pay $30 billion due on their $80 billion loan. Lest Development Loans totaled a staggering $540 billion for loans extended to third world countries, such as Brazil ($87 billion), Argentina ($43 billion), Venezuela, and Mexico ($80 billion); and threaten to cause a chain reaction of bank defaults through Latin America. The Fed monetary policy had caused the crisis, but the problem started long before with over-lending practices fighting against the forces of prudent assessment of economic fundamentals. This over exposure to risk made the commercial bank extremely vulnerable. Fed monetary policy started with blame focused on OPEC and its expensive oil in the 70s and 80s; OPEC profits soared and dollar surpluses accumulated as countries paid for the oil in dollars, reaching a peak of $68 billion; petrodollar recycling feed into the Euromarket arteries accelerating credit expansion velocity causing banks too over lend in competitive expectation of seeking profits against the better wisdom of risk; the Euromarket flung the petrodollar credit lines at LDC – lending over $1 trillion. LDC logic seem sound, the real interest was negative, so borrowing money now and paying later with cheap depreciated dollars made sense, as inflation moved upward, in these countries. In the US, M1 money was inflating at 15% annually. Japanese banks had $10 billion at risk in these LDC investments. LDC countries thought they could painless grow themselves out of the OPEC shock. Waste plague LDC, as too much of the debt was invested on uneconomic, corrupt, and wasteful investments. Mexico officials met with the IMF, de Lareiere, Donald Regan and declared, “Mexico needed lots of money” and President Jose Lopez Portillo was prepared to call world heads of state and announce default on Mexico debt. Volcker believe or knew that if the Mexico default that would cause the nine top US banks to go bankrupt and if the US system of banks failed the whole system would fail. At risk were 500 banks including Deutshe bank, Union bank, and Citibank (largest capitalization in the world). The fed was willing to make a $3.5 billion emergency transfusion. The fed knew they had created the crisis. Volcker war on inflation moved the economy’s real interest into positive territory. Each percentage point increase in long-term US interest rates added $3.5 to $4 billion in LDC debt, so a five percent increase would increase debt by $20 billion dollars, at the same time a soaring dollar value caused a world industrial recession and killed demand for commodities. As a result Mexico oil prices plunged in the 1980-81 recession and inflation leaped to 35%. Volcker need Mexico to make its payments and avoid default, so a $700 million swap to make interest payments was made available. IMF was forced into a $4.5 billion loan over 3 years necessary for Mexico to unlock government debt rescheduling prolonging extension of debt payment; $1 billion of the money for the loan when to purchase Mexican oil for the US; IMF approved $1.685 billion immediately and approved the temporary suspension of principle payments.[Learn More ...]


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