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1982, López Portillo, José, and The Financial Crisis of

By Swayze Fisher

José López Portillo was born in 1924 in Mexico City. He completed his primary studies at the School of Benito Juárez, and his secondary studies at the School of University Extension. He then went to the Preparatory National School, and was later granted a scholarship by the national government of the Republic of Chile to complete a political science major at the University of Santiago. He became a lawyer and taught at General Theory class at UNAM, where he was also a member of the Technical Council. He was later an advisor for the Institutional Revolutionary Party for economic and social planning. López Portillo was very close with the Secretary of Public Education and National Patrimony. After being promoted as head of different political positions several times, he assumed titles of such positions as President Coordinator of the Commission of Public Administration and Secretary of Property and Public Credit. He became President of Mexico on December 10, 1976, and ruled until December 10, 1982. During his presidency, José López Portillo brought about many radical changes, both economically and socially, for the people of Mexico.

When López Portillo became President, he inherited the economic mismanagement of his predecessor, Luis Echeverría. Mexico had already experienced its "first oil shock" (1973-1974), and was still recovering; although an oil producer, it was not a large exporter. On the other hand, prices of imports soared. The value of the peso deflated for the first time in twenty-two years as López Portillo assumed control. For the first three years in office, López Portillo strictly enforced policies to achieve economic and financial stability for the country. Then, he went on a spending and borrowing spree after Mexicans discovered that they had vast oil reserves. López Portillo assumed that oil revenues would always be high enough to service the fiscal operations. In 1979, however, conservatives took control of Iran, creating a second oil in the world, throwing international finances out of kilter. Banks ran into trouble. The recession of 1981-82 caused the international price of crude oil to decline dramatically. Mexico no longer could service its debts.

There are several reasons for the Mexican financial crisis of 1982. One problem for the economy was that Mexico was the third largest trading partner of the United States. Mexico also borrows much money from the United States to help it financially. Since the United States economy had been damaged by recession, it was having a significant impact on the Mexican economy as well. The United States usually bought 65% of Mexico's exports, and vice versa. The US began to purchase a smaller amount of exports and charged a higher rate for its exports. Therefore, the imports and Mexican capital rose steeply while the value of its exports dropped. Its chief exports, petroleum, silver, coffee, cotton, and copper, were not receiving the same recognition it had had in the past. This caused a 67% decline in the value of the peso and left 80% of the economy in the care of the government as foreign investment was destroyed. As stated in the Historical Text Archive, "The staggering budget deficit programmed by the Reagan administration and Congress and the decision of the Federal Reserve System to charge more for money drove interest rates up (the prime rate went up to 17%) and increased Mexico's debt burden by some $2.5 billion."

The strategy that López Portillo's government used was devoted mostly to close ties with the United States, therefore increasing economic problems for Mexico during this time. It borrowed mainly from the US to finance investments for its infrastructure projects, social and debt services, and industry plans. 34% of Mexico's revenues would come from borrowing in the projected national budget of 1982. The proposed solution to balancing its debt would be profits gained from tourist and petroleum exports. Therefore, by servicing its debt, the banks would roll over the debt if trouble arose. In January of 1982, the debt was around $70 billion--by October, the debt had reached $80 billion. They needed help from international bankers.

Then, the United States raised the value of the dollar to decrease the inflation rate; this approach increased the inflation rate for Mexico's economy, and added interest charges (from $2.606 billion in 1978 to $8.2 billion in 1982). Private citizens began switching their currency from pesos to dollars to insure that they kept the wealth. Ninety percent of the bank accounts were in dollar amounts, even though they were paid 23% less on interest than the peso accounts. Other people that did not transfer their money from pesos to dollars invested their money into foreign bank accounts or in US real estate. In February of 1982, which was not a surprise for any Mexican citizen, the government devalued the peso. José López Portillo hoped that this approach would increase the percentage of exports and decrease capital. It then raised wages paid to Mexican workers by 19-30% in March. By April, Mexico's largest private business, Grupo Industrial Alfa, closed due to bankruptcy.

López Portillo's government cut back expenditures; the national budget was cut eight percent. Other high-cost programs were postponed; the peso was again devalued to 49 pesos to the dollar. Then the government mandated that all bank accounts be payable in pesos in order to capture $12 billion in what had been dollar accounts. Income taxes were lowered, but consumer commodity prices were increased. José López Portillo, trying to gain some breathing room, got a 90-day extension on repayment of its short- and medium term-loans but it was insufficient.

In his last state of the nation address in September of 1982, López Portillo announced the nationalization of Mexico's banks. López Portillo switched to economic nationalism to divert attention from his government's economic mismanagement and falling oil prices. He also imposed exchange controls. He believed that the bankers were responsible for the problems of not meeting deadlines for its $80 billion foreign debt payments. "We are reaching the need for real change. Presidentialism in the old style is about to end. The majority party will have to make internal revisions." (José López Portillo, State of the Nation Address, September 1982) This decision to nationalize all banks was López Portillo's last attempt to solve the country's economic problems. "It was the last effort that I made to solve the basic problems, without achieving it." (José López Portillo, State of the Nation Address, September 1982)

President Miguel de la Madrid took office after the 1982 election. He reversed many of José López Portillo's policies, hoping for economic reform and stability. Foreign investment could not continue with the standards on which the economy was placed. When the government failed to achieve the people's needs as they promised in the 1982 election (return resources and political autonomy to the regions and cities), much public criticizing was developed.

On September 6, 1982, Mexico postponed all debt payments until the end of 1983. Since Mexico is such an important trading partner for the United States, the US began to make advanced payments in the amount of $1 billion for petroleum and giving them an additional $1 billion loan. (Historical Text Archive) According to the Historical Text Archive (The Mexican Financial Crisis of 1982), "It was US tight money policies that squeezed Mexico and the bad judgment of US bankers in continuing to loan money to Mexico that contributed to the crisis."