Mexico to Subsidize Banks Via NY Transfer News Collective * All the News that Doesn't Fit Mexico to Subsidize Banks By Mark Stevenson Associated Press Writer Wednesday, June 9, 1999; 5:20 p.m. EDT MEXICO CITY (AP) -- Mexico is preparing to give billions of dollars in subsidies to private banks -- many of whom don't need the money -- just months after it canceled a subsidy program for the tortilla, the basic food of Mexico's poor. Opposition politicians say the actions illustrate how market-oriented reforms have distorted political policy in Mexico, sacrificing long-term domestic programs to please financial markets in the short term. By paying premium interest rates on bad loan portfolios the government bought as part of a $65 billion bank bailout -- rather than the discount rates the banks offer their clients -- the government will pay banks as much as $4 billion a year in interest premiums. The payments could start flowing within weeks. By contrast, the tortilla subsidy program cost the government $400 million per year -- a tenth of what the banks will get -- before it was ended in December. ``We have to keep the banks attractive so people will invest in them,'' said Vicente Corta, president of the government agency that oversees the bank rescue program. That program pulled Mexican banks out of a 1995 crisis caused by poor lending policies and a sudden rise in interest rates. Approved by Congress in 1998, it pledged to keep the banks from failing -- not guarantee them profits. But the largest banks, while still undercapitalized and with poor asset quality, are mostly profitable again, making hundreds of millions of dollars by offering low rates on deposits and high rates on loans. For example, in May, they paid about 10 percent annual interest on long-term deposits, while charging 37 percent on auto loans and 55 percent on credit card accounts. The banks' spread is one of the highest in the developed world. A few smaller banks desperately need the cash -- but are in such poor shape that even such generous subsidies may not solve their problems, said Sen. Jorge Calderon of the leftist Democratic Revolution Party. Do the big banks really need the interest rate payments, currently about 20 percent per year, 7 percent above projected inflation? ``The banks could accept a lower rate,'' said financial sector analyst Rogelio Urrutia of Mexico City's Valores Finamex. ``Most of them are profitable.'' Finance Secretary Jose Angel Gurria has defended the interest rates, saying they are far below the banks' normal profit margins on investments. But the banks didn't invest cash to get these returns -- they unloaded bad loan portfolios that are worth perhaps one-third of their face value. Meanwhile, the government canceled the tortilla subsidy program, which Gurria had criticized as ``unfair'' for making cheap tortillas available to the rich as well as the poor. Gurria did not respond to requests for comment over two weeks. The two actions appear to be ideologically rooted: Federal officials seem convinced that banks are truly productive -- and should be subsidized -- while subsidies to the poor are largely wasteful. But the privatized banks don't make many loans to businesses or consumers, and haven't for four years. The tortilla subsidy, on the other hand, guaranteed fixed prices for the poor on a relatively cheap food that has provided generations with their main source of calories. ``This is a profound distortion'' of public policy, Calderon said. Calderon predicted the high interest rates will cause a budget crunch when the bank bonds have to be paid off in eight years -- perhaps forcing future administrations to cancel more social programs. (c) Copyright 1999 The Associated Press ================================================================= NY Transfer News Collective * A Service of Blythe Systems Since 1985 - Information for the Rest of Us 339 Lafayette St., New York, NY 10012 http://www.blythe.org e-mail: nyt@blythe.org ================================================================= nytcamer-06.11.99-02:14:59-5598