by Nomi Prins
Undaunted, Carstens traveled to New York City in September 2011 to attend the Bloomberg Markets 50 Summit. “The balance of risks in Mexico still calls for a relatively neutral monetary policy, which is precisely where we stand today,” he told the summit. “There may be circumstances in the future that call for lower rates.”159 The Wall Street crowd, business executives, and various leaders did not only see a banker from Mexico—they saw one of their own.
Carstens met with William Dudley at the New York Federal Reserve for a working lunch and meeting afterward.160 That month, he was named Central Bank Governor of the Americas for the Year 2011 by Emerging Markets magazine. Later that year in Miami, Florida, he received a Bravo Award 2011 by Latin Trade magazine.
Then Mexico’s currency took a turn for the worse. The peso fell 14 percent from August to late September, hitting 13.56 per dollar.161 This slump was in part attributed to speculation that Mexico would follow Brazil in cutting its key rate. Putting it into context at the Fed’s annual late-August Jackson Hole central bankers gathering, Carstens noted his concern about a US slowdown, but not about rate comparison in Latin America.
The rivalry between Mexico and Brazil, the rock stars of the emerging markets, intensified. The battle lines were drawn around legacy relationships and geography. Mexico had proximity to the United States, whereas Brazil had regional dominance and major trade relations with China. Private investors saw opportunities in playing both sides of this monetary combat, and currency speculators were equally happy to take bets on how the regional political relationships would impact exchange rates.
Respective national banks also sought to take advantage of shifting geopolitics and investor appetites by competitively offering their services. The next president of Mexico would offer significant reforms, a different approach to cartel violence, and an opportunity for financial innovation. Elections on both sides of the border had investors eager to bet on the outcome. The Mexican economy, where the risks were known compared to some of the other emerging market countries, was an outpost of the American marketplace.
FASTER GROWTH AND A NEW PRESIDENT
According to the Organisation for Economic Co-operation and Development, Latin America was expected to grow 4.1 percent in 2012. Mexico was blossoming again while Europe was flailing.
The year 2012 brought another US presidential election and a debt and identity crisis in Europe. There was also a general election in Mexico. As a July 2012 New York Times op-ed pointed out, “If ever there were an election preordained as a result of economic performance, it would be Mexico’s election.”162 Centrist PRI leader Enrique Peña Nieto won handily (Calderón by law could not run for a second term anyway, but his party was trounced). Peña Nieto had been the governor of the state of Mexico from 2005 to 2011 and had worked for President Zedillo during the Clinton years. Peña Nieto was a lot like Obama—young, charismatic, he had a lovely wife. But his party, like the others, was riddled with corruption, and, as with Calderón, the election invited voting controversy. As his minister of finance and public credit, he appointed Luis Videgaray Caso, an MIT graduate and his confidant since 2005.
The Fed remained cautious on Mexico. In July 2012, Fed governor Elizabeth A. Duke visited Mexico City to discuss central bank cooperation in times of crisis. She observed, “Though Mexico’s recovery in the second half of 2009 was strong, it had less momentum and considerable economic slack remained in the country. As such, the Bank of Mexico did not consider it necessary to raise policy rates during its recovery period, unlike many other Latin American central banks.”163 Mexico had passed the good neighbor monetary policy test. Other Latin American central banks had deviated from the Fed’s cheap-money policy to attend to inflation. In contrast, Mexico had toed the line, the collusion blueprint.
At the same event, Carstens supported the Fed’s artisanal-money coordination policy. He stated, “These turbulent episodes showed that international coordination in implementing policies is more productive and efficient than unilateral implementation… in times of crisis the benefits of coordinated action are more than evident.”164
Mexico now proved comparatively beneficial to the United States as European debt problems grew. The peso was again dropping relative to the dollar though. The depreciation lowered the price of Mexican exports to the United States and raised the cost of its imports.165 Brazil and China were forging a stronger economic alliance with each other. The United States needed Mexico in its corner.
Because of that, the Fed announced another money-crafting measure on September 13, 2012. Nearly four years after the crisis, US banks still couldn’t sell their toxic mortgage assets. So the Fed jumped into action by purchasing $40 billion worth of them per month.166
When asked for his comments on the measure by Reuters, Carstens responded in solidarity: “We welcome the measures because for Mexico the most important issue is to have a strong US economy.” He added, “If monetary policy can do something to strengthen the economy of the United States, then obviously that will end up helping us as well.… We agree with the policies adopted.”167 A sharp slowdown in the United States would hurt growth south of the border.
With the European debt crisis intensifying, talk of a double-dip recession spooked markets, central banks, private banks, and the general population. It was a US election year and Obama wanted to take credit for “saving” the economy, which meant the economy had to preserve its state of “recovery.” Sure enough, underscored by the Fed’s money-conjuring policy, Obama easily retained his position as leader of the free world against Republican challenger Mitt Romney. Bernanke kept his post until 2014. His eventual successor and former Clinton adviser, Janet Yellen, would advocate his policies.
Meanwhile, Europe entered double-dip-recession mode despite, or perhaps because of, actions of the troika (the IMF, ECB, and EC). Anti-austerity measures blanketed Southern Europe. Portugal, Spain, Italy, and most notably Greece became grounds for widespread protest and strikes.
Latin America provided a breath of fresh air for speculators and conjured-money flow. While Europe faltered, Mexico roared. As the International Business Times reported on December 11, 2012, “Quietly, steadily and without much of the glitz and attention afforded its northern neighbor, the Mexican stock market has been on a tear this year.”168
SEEKING SOLUTIONS
In the midst of Mexico’s lukewarm economic rebound, on March 8, 2013, Banco de México cut its key rate by 0.5 percentage points to a record-low 4 percent. It was the first cut since 2009. After a nervous global market reaction to the cut, the bank assured the markets the cut was not part of an overall easing cycle for the future.
In Banco de México’s inflation report, the biggest concern was growing global risk. “The slowdown of the Mexican economy, which had been observed since the second half of 2012, intensified. This loss of dynamism derives from a series of adverse shocks, both domestic and external, which have amplified the slack in the economy.”169
Subsequently, in its September and October meetings, Banco de México lowered rates by 25 basis points at each meeting.170 Mexico began 2013 with rates at 4.5 percent and ended with them at 3.5 percent. Mexico’s 2013 economic growth was just 1.3 percent.171 Calming markets and projecting assertive action was all that stood between confidence and crisis. Carstens was not about to be the one who let the ship take on water.
But a series of economic problems plagued Mexico. In April 2013, overdue consumer debts hit their highest level since the 2008 global financial economic crisis.172 That wasn’t all. Mexico’s GDP suffered a surprise contraction of 0.7 percent in the second quarter versus the previous quarter. It was suddenly hitting its worst year since 2009.173
Facing an approval rating slumping along with the economy, in May 2013, President Peña Nieto announced a fiscal reform package. In theory, the funds would help struggling small and medium-sized businesses, which numbered about five million in Mexico at the time.174 The idea was to ignite the economy from the ground up. Carst
ens estimated the reform could add an ambitious half a percentage point to growth within two or three years.
Just six months earlier he had praised the Fed’s latest QE plan, Carstens was now irritated about the situation, not just for himself and Mexico but for emerging markets. In the middle of August 2013, he spoke at the Federal Reserve Bank of Kansas City, where he excoriated the Fed’s QE methods and lack of a clear exit plan as potentially causing further turmoil.
“In advanced economies,” he said, “it would be desirable for them to implement a gradual and predictable exit from unconventional policies. Better communication by the Fed, to speak in one voice, would be very important at this time as well. Advanced economies’ central banks should also mind the spillover effects of their actions. Otherwise the lingering crisis will be reactivated, but probably with new actors. In the case of emerging market economies, they need basically to strengthen their economic fundamentals.”175
On October 14, 2013, Banco de México celebrated its twentieth year of political independence from the Mexican government, which allowed it to set price stability for the economy, technically absent of intervening politicians.176 At the corresponding conference “Central Bank Independence—Progress and Challenges” held in Mexico City, Bernanke addressed the crowd—via prerecorded video—to celebrate. ECB head Jean-Claude Trichet was also in attendance.
Bernanke acknowledged Carstens’s efforts during the global financial crisis and wished him well in his work stabilizing the Mexican economy. Using words unlike those in former finger-pointing Fed reports, he complimented Carstens for mirroring Fed policy. “The strong links between our economies have led to close cooperation between our central banks. An example is the bilateral currency swap arrangement between the Federal Reserve and the Bank of Mexico that was set up during the global financial crisis… one of fourteen that the Fed established with foreign central banks around the world [that] alleviate dollar funding pressures, reduce interbank borrowing rates, and calm market fears during some of the worst phases of the crisis.”177 Bernanke never hesitated to praise himself for coordinating global central banks.
Five days later, Manuel Sánchez, deputy governor of the Banco de México, addressed the United States–Mexico Chamber of Commerce in New York City. He underscored the downside of the Fed’s actions: “Until last April, these policies constituted an important factor behind substantial capital flows directed to emerging markets in the search for higher yields.”178 The unprecedented nature of Fed policies was affecting the emerging markets in general, and Mexico in particular.
The Fed didn’t just “save” the US financial system, it altered the flow of capital everywhere. The resultant obsession for seeking higher-yielding securities always had a dire flipside—“hot” or speculative capital rushed out of emerging countries at the worst possible moments.
BANCO DE MÉXICO FURTHER EMBRACES CHEAP MONEY
For Mexico, no real growth occurred during the first half of 2014. By June 6, 2014, Banco de México cut rates again from 3.5 percent to a record-low 3 percent.179 The domestic economy faced several trouble spots. GDP growth remained under 3 percent despite more positive forecasts, and income from exports suffered from the drop in commodity prices.180 Year-over-year, retail sales fell 1.7 percent. Consumer confidence declined.181 While the financial media heralded the road to recovery on Wall Street, the financial situation for Mexico seemed to be anything but stabilizing.
Foreign money, on the other hand, remained abundant owing to cheap-money policy. As a result, major foreign bank conglomerates decided to lend more to the local economy. In September 2014, Citi-Banamex announced a four-year $1.5 billion investment program. Peña Nieto, Citigroup CEO Michael Corbat, and the chairman of the board of Banamex and co-president of Citigroup Manuel Medina Mora championed the project.
Manuel Medina Mora said, “These investment programs are a reflection of the commitment that those of us who are part of Banamex have with Mexico.… It is a privilege to be the National Bank of Mexico.”182 As of July 2014, Banamex made up 13 percent of loans to Mexican companies versus the 32 percent that Banamex and Citigroup extended in 2000.183 Banamex also promised to expand lending to small and medium-sized enterprises (SMEs) to $4 billion, plus support public and private energy sector projects with $10 billion of credits, debt, and capital issuances.184 From 2009 through 2014, loans to SMEs grew at a real average rate of 12 percent per year.185
But, by late 2014, with the peso and oil prices falling, many loans were placed on hold. Medina Mora announced his departure from Citigroup effective 2015. Much controversy surrounded him, stemming from a corruption and fraud case involving Banamex and services company Oceanografía.186 Mexican regulators fined the Citigroup unit of Banamex another $2.2 million.187 The symbiotic connection of central banks, private banks, and US banks all blended into one dirty tequila sunrise.
TO FOLLOW OR NOT TO FOLLOW
Though Mexico was struggling economically, the US economy appeared rosy on the surface, inflaming fears through the Wall Street corridor of a Fed rate hike. Carstens again expressed his allegiance to US monetary policy at the Tech, the country’s ultra-prestigious Mexico Autonomous Institute of Technology, in Mexico City: “Given an imminent increase in US interest rates, there’s a high probability that rates in Mexico will also have to be raised this year.”188 The suddenly hawkish Carstens was wrong about the imminence but correct about the increase.
Latin American economic growth stalled further because of more drastic drops in the price of oil and local currencies relative to the dollar. Oil was a major contributor to the economic engine in Mexico. Falling oil prices meant a shock to the system. It appeared as if central banks had hit a wall in their power to manifest market enthusiasm. The world was proving more difficult for the Fed, its key allies, Banco de México, and others to navigate—or control. But that didn’t mean the Fed was going to throw in the towel on collusion.
Carstens was selected to be chairman of IMF’s policy advisory committee for a three-year term effective March 23, 2015.189 It was a consolation prize after Lagarde nabbed the top spot at the IMF. It did, however, recognize Carstens’s unique connections to the United States and his global stature. He was the first Latin American to hold that title, and the post reflected the extent to which Mexico was politically and financially integral to the United States in the artisanal money era.
Yet, Carstens remained a man standing on the outside of the United States looking in. He was shunned by the Western financial leaders to whom he had shown consistent allegiance. The fact that he was rejected by the Bretton Woods system would not be lost on the central banker. He still had navigated Latin America politically to hedge his other power aspirations. By April 2015, he was even more worried about the state of emerging economies. The cracks in the wall of financial stability were widening.
While at an event held by the Peterson Institute for International Economics in Washington, DC, Carstens criticized the long-term impact of Fed policy because “recovery of the world economy… still depends heavily on the monetary policy stances in main advanced economies [AEs] that are not sustainable over the medium and long term.” He added that recovery had been slow and was “vulnerable to setbacks.”
Despite years of questionable results, he noted, “the only stabilization policy instrument left was monetary policy, and therefore the main central banks have adopted, at different times, speeds and with varied modalities, unprecedented expansionary monetary policies.”190
Carstens was playing both sides. He wanted to echo the Fed’s policies so that Mexico could benefit from its association with the United States. However, the central banker also knew that his country had to compete with large Latin American economies like Brazil for foreign capital.
Mexico and Brazil represented 62 percent of the GDP of Latin America, and 55 percent of its population and its land. Both countries struggled under high foreign-denominated debt. Both nations’ currencies were down relative to the US dolla
r. Both had systemic issues of corruption, though Brazil’s were worse. Weaker growth in the region was an outcome of the volatility surrounding the Fed’s manipulation of global monetary policy, which had altered the cost and availability of cheap money for speculators and bankers, but not regular citizens.
On March 11, Banco de México announced it would offer $52 million a day at auctions to sell US dollars. The maneuver was made to support the peso by an additional $200 million on days when the peso weakened by 1.5 percent from the previous trading session rate.191
Throughout Mexico, concern grew that any tightening policy could further hamper the peso by strengthening the dollar. To support the currency, Mexico’s central bank decided on July 30, 2015, to increase its daily dollar auction from $52 million to $200 million.192
Finally, Banco de México sent the message that if peso volatility continued, it could act independently of the Fed. “If necessary, we can raise interest rates at any moment,” Carstens said.193 He was stepping out of the Fed’s shadow, while keeping one foot in it. He did not want to follow Ortiz’s path of diverging with his fellow conjurers too far. To step out of the shadow completely was paradoxically to be left in complete darkness.
Although tightening monetary policy was an uncharacteristic move by Banco de México, especially in a weak economy, supporting the level of the peso reigned crucial. The weak peso was hurting Mexican exporters and farmers.
