When it rains, it pours: Mexico’s bank Nationalisation and the Debt Crisis of 1982

Abstract

How are expropriations related to governments’ debt defaults? The literature has shown that expropriation episodes and debt defaults have rarely coincided, suggesting that each event resulted from a different set of factors. The aim of this article is twofold. First, I analyse default–expropriation relationships in the years previous to the debt crisis of 1982. I show that while default and expropriation episodes did not always coincide, countries that expropriated at least once during the period were also those that defaulted more often. I observe that countries that expropriated had worse macroeconomic indicators than countries that did not. Second, I focus on the case of Mexico, when its announcement of a debt moratorium in August 1982 was followed, less than one month later, by the nationalisation of its banking system. Both events were outcomes of an acute economic crisis. The nationalisation announcement aggravated the crisis because an agreement with the International Monetary Fund (IMF) seemed increasingly uncertain. I provide evidence from the largely overlooked bond market (on which the government never defaulted) that shows that investors reacted negatively to the bank nationalisation. Finally, I present original, published and unpublished primary sources to demonstrate that commercial banks, as well as international organisations, expressed misgivings about the banks’ nationalisation. This fact may have hindered the country’s economic recovery through the deterioration of public confidence and a decline in foreign investment.