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posted on 24 September 2016

There's No Wall Between The Fed And Banco De Mexico

from Daily Reckoning

-- this post authored by Nomi Prins

In regard to monetary policy, Mexico is a good neighbor to the U.S. It has been mirroring Fed policy since the financial crisis. As the U.S. Fed cut rates to zero, Mexico did the same by cutting rates to a 3% low by 2014.

When the Fed did QE, Mexico did too. When the Fed raised rates for the first time in seven years on Dec. 16, 2015 by 25 basis points, so did Banco de Mexico, the very next day. But, there's a twist...

Banco de Mexico raised rates again on Feb. 17, 2016 by 50 basis points. No one saw that coming. Thus, the peso - that had declined steadily from 10 to 19 to the dollar between 2008 and mid-February 2016 (and by 18% during 2015) - strengthened back to 17.66 to the dollar as of March 24, 2016.

Banco de Mexico didn't raise rates to fight inflation. Mexico has the lowest inflation in Latin America and one of the region's highest 2016 growth projections.

It raised rates to protect the peso. That way Mexicans could keep importing U.S. products without getting hammered on the exchange rate.

The rate hike also bolstered the $101.5 billion of U.S. foreign direct investment (FDI) in Mexico (the U.S. is the highest source of Mexico's FDI.)

But, in order to serve the political-financial Mexican-American elite, Mexico gave up its independent monetary policy (part of James Rickards Impossible Trinity analysis). That boosted the peso and helps keep foreign capital in Mexican bank accounts. In turn providing slightly higher rates there than in the U.S.

Giving up its independent monetary policy also keeps Mexico from having to sell Treasuries to bolster its reserves. That helps the Fed keep rates low even if it raises rates officially. That's partly due to the cozy relationship between Banco de Mexico Governor Agustin Carstens and Fed Chair Janet Yellen.

These folks have no wall. If you go to Washington, DC, you'll see the Mexican Embassy is the closest G20 nation relative to the White House.

Bad Loans, Lawsuits and Corruption

Citigroup through Banamex, extended lots of loans to Mexico with cheap Fed-fabricated money. In September 2014, Citigroup-Banamex announced a $1.5 billion investment program in Mexico to be implemented over the next four years.

President of Mexico, Enrique Peña Nieto, Citigroup CEO Michael Corbat, and then Chairman of the Board of Banamex and co-President of Citigroup, Manuel Medina Mora were involved.

They said Banamex would particularly expand lending for small and medium-sized enterprises (SMEs) to $4 billion. And expand support to public and private projects in the energy sector by $10 billion through credits, debt and capital issuances.

But with the peso and oil prices down since then, loans that were in the process of getting extended got put on hold, and others began defaulting.

In addition, lawsuits on old financial corruption popped up. According to a suit filed this February, fraudulent Citigroup-Banamex's loans led to the 2014 collapse of Mexican oil services firm, Oceanografia.

What is the Income Play Rich Investors Love? (Hint: It's Tax-Free)

The firm had enjoyed cozy high-level connections to senior politicians, though allegations of tightness to former President Vicente Fox and his family were denied, and did work for state-run oil goliath, Pemex.

Dutch lender Rabobank Groep is now suing Citigroup on behalf of clients and investors, for $1.1 billion in associated losses from those scam loans. The fraud became public knowledge in 2014.

Citigroup CEO Michael Corbat admitted in February 2014 that $400 million of loans to Oceanografia by Banamex were fraudulent. As a result Citigroup restated its 2013 earnings. The FBI launched investigations into Citigroup's lack of compliance with banking regulations, and the possibility of a money-laundering scheme.

Citigroup noted certain of Oceanograf'a's invoices "were falsified to represent Pemex had approved them." The current complaint alleges Citigroup-Banamex conspired with Oceanografia to accept falsified contracts in return for cash advances, while Pemex repaid Citigroup-Banamex with interest.

The suit resurrects that fraud and collusion exists between the financial and political parties and individuals involved. It may even point to Petrobras-type corruption that extends to more companies, government officials and banks across our southern border.

Meanwhile, bolstering the peso and rates stops some bloodletting for Mexican companies stuck having to repay dollar-based loans while losing money on the exchange rate. This helps Citigroup-Banamex ride out other possible loan problems, or lurking 'shenanigans.'

In addition, roughly $26 billion, or 80% of Citigroup's Latin America consumer loans last year, were in Mexico. Citigroup just announced it was shutting retail branches in Brazil, Argentina and Colombia, but not Mexico.


Because Citigroup's married to Mexico's elite. Plus, its retail business extracts credit card interest rates from Mexicans at levels over 40% per year. That's a great hedge if U.S. defaults rise.

Mexican bank accounts provide an alternative capital source for U.S. banks, like Citigroup. This advantage won't last long because of general economic weakening in the U.S. and Mexico.

There are also looming bank problems and crimes, but it helps Mexico for a short while, relative to the rest of Latin America.

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