TALKING ABOUT BAIL OUTS
MEXICO 1995



DR. ERNESTO ZEDILLO

PRESIDENT OF MEXICO

LOS PINOS, MEXICO, DF

MR. PRESIDENT, SELL PEMEX “NOW”

RICARDO VALENZUELA

LIBERTY AMERICAS FOUNDATION

MARCH, 1996

Mexico is at the greatest and most dangerous crossroads of its history. The political problems have disgorged an economic depression without precedent that is, as well, about to annihilate the spirit of the Mexicans, the soul of the nation. Beginning with the devaluation in December 1994, the country’s GNP has shrunk ridiculously, beyond description, the per capita income has fallen to the level of the 50’s, and the poverty level is indescribable.


Mexico is in this serious situation without the participation of the average common Mexican citizen in these irresponsible events that brought it about; nevertheless, now unilaterally and autocratically, it is assumed that it is he who bears the weight of the load, he who pays the price for something that he did not do. The groups in power that do not want to accept the change, have proposed to sabotage it without caring what it costs, and for whom, thus, we are living the consequences of their actions.


The global financial markets are currently adjusting and accommodating a great number of New participants. The international monetary market is, basically, under great pressure due to the increase in commerce among the countries of the world, in this digital universe, in this New market without barriers. Mexico will not be able to successfully face the New challenges on the horizon of the almost-present Twenty First Century, if courageous and responsible decisions are not taken to solve its problem. Mexico requires aggressive, daring, bold and responsible solutions. Mexico requires a Marshall Plan such as the one that lifted Europe from its deathbed after the Second World War.


What our country does not need is the socialist, keynesian, anti market shock treatments prescribed by the IMF, much less the prescriptions of the political parties that would return to our nationalistic and revolutionary past and which got the country in the mess we have been living for the past 25 years. The core structure of our country is mortally injured and only the intrepid actions of honest and visionary leaders can save it. Private enterprise and the structure of the country is slowly expiring and with it the faith, hope and the future of Mexicans.


Mexican enterprise is agonizing because of the distorted and disfigured surroundings that have become a vicious and lethal cycle: there is no credit, the market depresses, unemployment increases, the markets disappear, the bankruptcies multiply, the financial system is in ruins, the peso has been loosing its value over and over for the past 20 years etc, etc, etc.


Mexico needs a general recovery plan, Mexico needs a “New Deal”, but using the experience derived from the history of the US, it must not be Keynesian, statist, or paternalistic, much less should it be nationalist or revolutionary, because we already know that, it does not work and the best proof of its failure is the totally dependent and unproductive social layer in the US and Mexico.


Mexico needs a New Deal but with market overtones or true promotion of Economic development. This plan must be geared to save Mexican business and, as a consequence, the country. Rehabilitating businesses, lowers unemployment, activates the internal market, increases sales, large and small business profits, the state collects taxes and stops subsidizing crisis, the economy grows, trust is reestablished, international capital returns, the currency is strengthened, etc. This New Deal should be different from the one the USA had in the Roosevelt administration, and the big difference would be that our Deal would not emanate from the government, but from the people.


The business problem is a financial one, from this derive the greatest number of the country’s misfortunes; unemployment, poverty, bankruptcies, lack of faith and mistrust among citizens, loss of security with an increase of criminal activities, massive emigration caused by lack of opportunity, capital flight, and general despair.


The time has come that we, as Mexicans, find and implement a solution to the problems of our country through the effort of the civil society and not continue depending on the decisions of a centralist government that has totally lost contact with the desires, the needs, and the dreams of 100 million desperate countrymen. It is time that civil society fully exercises its power for the benefit of the country.


Although our proposal to the civil society is very specific with reference to our petroleum industry; Mexico needs to accompany these actions which, of themselves would fall short of the measures that are required for our country to finally begin its march to a true development that brings prosperity to all social levels that form our nation, with another series of complimentary measures that truly consolidate the proposed actions — drastic and bold measures that only brave leaders would dare to implement.


Mexico needs to start a serious process of deregulation of the economy, a true liberalization. Mexico needs to continue its process of privatizing state enterprises that have not yet been put up for sale such as Federal Commission of Electricity, Railroads, and, very specially, conclude the true privatizing of the ejido (community land own by the government) to make it finally productive. A drastic and total reform of our Federal Labor Law is required that will really allow development without affecting the worker, and more importantly, we need to reform our constitution, we don’t need a socialistic constitution any more, a constitution which design the State as the rector of the economy and do not protect private property. Finally, we need to reform our very corrupt judicial system.


PEMEX ranks tenth among the world’s business, but it is also one of the most inefficient, and above all, one of the greatest sources of corruption in the country. The government has resisted any type of reform of this monopoly for political reasons and, in a subliminal way, has identified it for Mexicans as a symbol of our national sovereignty as well as the most important achievement of the already monotonous Mexican revolution. Every year we Mexicans celebrate the expropriation of the oil industry, without realizing that that is the cause of its demise.


Nevertheless, only through privatizing can the problems of corruption, inefficiency and the enormous losses that are affecting it be resolved. If, in the coming years, large investments in exploration and modernization are not made, this monopoly will not be able to satisfy the increased internal demand of the next five years. This means that Mexico, among the leading countries in the world with proven oil reserves, will become an importer by the year 2,005. The country is already importing close to three billion dollars of refined products, natural gas and gasoline.


Despite the fact that PEMEX has become, in the eyes of the Mexicans, a symbol of our sovereignty, it is currently developing a process to obtain foreign capital on the order of 20 billion dollars, which leads us to think of the irony of the situation: “Our national symbol of sovereignty requires foreign capital to survive”. This is one of the sources of the country’s debt that has

trapped and asphyxiated it during the past 20 years and converted Mexico in the greatest debtor country in the international capital markets of the world (170 billion dollars), and now our “political leaders” want to ad 70 billions to that already monstrous debt with the FOBAPROA project.


I, as a Mexican concerned for my country, propose to the civil society of Mexico and to the international community for their support, a plan to raise it from its convalescent bed:


1. The sale and privatizing of the assets of PEMEX, with an appraised value of more than 150 billion dollars, through a clear and transparent auction in full view of the world and in which nationals and foreigners can participate; should take place with the same plan applied by Argentina: on Wall Street, through a public offering on the international financial markets.


2. The creation of the Mexican Reconstruction and Promotion Bank, contributing those 150 billion dollars as capital for the institution, controlling the flow of that money using one of the foremost international accounting firms and an audit committee comprising prominent and representative members of the civil society, businessmen, workers, community and religious leaders, etc.


3. The creation of a Board of Directors and a management team for the Bank with honest, professional and apolitical individuals with the responsibility to administer the institution with clear and measurable objectives; to save the Mexican economy, that must perform their tasks with a clear plan and in full view of the nation. This team must include the participation of the best individuals in the world, without reference to their nationality, simply in their professional capacity and their honor — including controversial individuals such as Mike Millken, Domingo Cavallo, Pedro Aspe, Warren Buffet Luis Pazos, Alan Greespan, Art Laffer and the like.


4. All Mexican businesses would issue bonds for the full amount of their debt for terms up to 30 years, these would be purchased by the Reconstruction and Promotion Bank at the current prices, thus consolidating the business debt that is currently estimated at 70 billion dollars. The Mexican Banks would thus be freed from this problem and, above all, be totally free to initiate the true promotion of New projects.


5. The bonds issued for the all of Mexican businesses would yield an interest of Libor +1 and would have a five year grace period for capital payment and, in cases that justify it, the grace period could be extended.


6. Part of the consolidation for businesses that, because of their precarious situation require it, could take place through an infusion of risk capital (equity) represented by convertible stock, redeemable in a reasonable period, providing the alternative for the owners to rebuy or convert to debt the original equity contributed.


7. Reduce the income tax to 20% and in this way energize the recovery of businesses and, in general, stimulate the economy, negotiating, in some cases, not to include accumulated losses as a tax benefit against future earnings and a declaration of an immediate tax amnesty by the treasury department.


8. Negotiate with Canada and the US the immediate and total abolition of taxes and tariffs in trilateral commerce, formalizing not a Free Trade Agreement, but rather a Common Market among the three countries, similar to the European model in which free immigration is included and, in this way, relieve the potential problem so feared by the US as a detonator of inflation, the pressures in the labor market because of full employment of its economy.


9. With a part of the 150 billion dollars derived from the privatization of PEMEX, acquire a percentage of the sovereign debt of the federal government with the respective discounts according to quotes of UMS paper in the international secondary markets, in order to pay part of the foreign debt of the country which is the N’ 1 in the world. The government could also retire some of the internal debt and that way, liberated financial assets which can catapult the economy of the country.


10. Use this paper to liquidate the business debt with the Mexican Banks providing the benefit of the discount in the acquisition as part of the total consolidation, given that the Mexican Banks in turn, can liquidate its liabilities to the federal government with that same UMS paper (FOBAPROA). This would be a SWAP operation.


11. Use the remainder of the 150 billion dollars to recapitalize the Mexican Banking system with a commitment to sell this equity participation in a reasonable time period to Mexican and foreign investors, generating in that way the stabilization and modernization of the financial structure of the country, conditioning this support to the financial system for the Banks to assume the responsibility of resolving the financial problem of individuals (mortgages, credit for purchase of automobiles, credit cards, etc.) under the same conditions that are given to businesses.


12. Upon the conclusion of the process, sell (liquidate) the Bank portfolio in the International secondary Capital Markets, including the already recapitalized Mexican Banks, and having freed (purchased) its assets, it would have enough resources to compete and invest, with the ability to offer products similar to those offered by the international Banks, but above all, it would provide a situation of extreme liquidity to resolve the financial problem of individuals and support New productive activities that definitively would be generated with this New plan. With the capital out of the sale of the portfolio of the new Bank, proceed to liquidate the whole foreign debt of the country.


13. Promote with US and Canada the establishment of a common monetary system based on the dollar that, in turn, must be backed totally with a gold reserves and would definitively end the speculative market, inflation, devaluation, manipulation of interest rates, etc. Managed as a second alternative, establish a monetary management plan similar to Argentina with the creation of a Currency Board and a strong tie to the dollar.


To implement this program, we need in Mexico a very brave leader, we need a real patriot and bold man as the next president. We need that man to became president in the year 2000.

PD. This plan can also work for the USA selling the land that the government own in the west of the country. (90% of the land)

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