Former Minister of Finance of Mexico Blames G8

Published on April 18, 2009

Despite concerns in emerging markets about the potential need for debt restructuring in their own countries, the Group of Eight — with the United States in a leading role — actually incubated the worldwide meltdown in credit markets, said Francisco Gil-Diaz, executive president of Telefónica de España-México and Central América and former minister of finance of Mexico.

“Maybe we should have been worried about you guys,” Gil-Diaz said of the G8 during the lunch keynote at the sixth annual Vale Latin American Business Conference, sponsored by the student-led Latin American Business Group, at Gleacher Center on April 18. “Maybe we should have been worrying about how to create conditions that were not going to lead to the type of imprudent overlending we have seen by commercial banks over the last few years.”

Meanwhile, U.S.-endorsed Collective Action Clauses (CAC) have provided a successful market-based mechanism to address debt restructuring in emerging markets, he said. “The whole idea of these clauses is that when a certain percentage of lenders accept restructuring, the restructuring is binding for all the lenders,” Gil-Diaz said.

Fears that CACs would not be accepted or would negatively affect markets with increased costs were unfounded in research, he said. “That did not happen,” Gil-Diaz said. “We had no crisis from the CACs. The supposed improvements in the type of restructuring and renegotiations that were going to take place in emerging markets were really not needed.”

The G8-led crisis started with banks becoming securitizers, although that practice was not the only cause and, overall, represents an improvement in the banking sector, he said. Legislation and federal lending practices encouraging people to get mortgages with little or no collateral precipitated the crisis, Gil-Diaz said.

“I remember one example of a Mexican agricultural laborer in Southern California who had no collateral and earned $20,000 a year from his job in the fields,” he said. “He was able to get a loan of $750,000 for a home. That was the kind of stuff that was going on in the banking sector.”

Those loans were enhanced and sold to insurance and other firms, rated AAA for their insurance, and then sold in the market, Gil-Diaz said. “Maybe then they were traded three or four times until nobody knew who had originally lent the money,” he said. “With a large percentage of those loans, there was no credit or risk evaluation.”

He called the amount of derivatives created “amazing” — 30 times the GDP of the United States and eight times global GDP in 2007. “It’s an incredible feature,” he said. “If you look at the open amount, it’s not that large, maybe $600 billion. The problem is that you never know which of those contracts are going to be honored or not. The open amount is not necessarily the relevant amount.”

Even though AIG and banks that provided insurance have been taken over or supported by the U.S. government, many contracts involved in the crisis are not being honored, Gil-Diaz said. “We don’t know the extent of the problem, nor the size of the losses,” he said. “That’s perhaps the biggest overhang we’re facing now in the world economy.”

                                                                                                                        --Phil Rockrohr