Legislators Approve Controversial Initiative to Bail out Bank-Rescue Fund (Fobaproa)

SourceMex Economic News & Analysis on Mexico, December 16, 1998 | Go to article overview

Legislators Approve Controversial Initiative to Bail out Bank-Rescue Fund (Fobaproa)


In mid-December, the Chamber of Deputies and the Senate approved a plan to bail out the controversial bank-rescue fund (Fondo Bancario de Proteccion al Ahorro, FOBAPROA). The initiative was approved just days before the scheduled completion of the 1998 legislative session.

The FOBAPROA initiative passed largely with support from the governing Partido Revolucionario Institucional (PRI) and the conservative Partido Accion Nacional (PAN). The center- left Partido de la Revolucion Democratica (PRD) voted against the measure in the Senate and boycotted the vote in the Chamber of Deputies, charging that the plan drafted by the PRI and the PAN unfairly benefited wealthy bankers at the expense of Mexican taxpayers.

The vote in the Chamber of Deputies was preceded by a noisy demonstration organized by the debtors-rights group El Barzon, formally known as the Asamblea de Deudores a la Banca (ACDB). Demonstrators forced their way into the legislative chamber, hurling rotten tomatoes and flour primarily at PAN and PRI legislators. Members of El Barzon accused the PAN of treason against the Mexican people for supporting a PRI-led initiative that "condemns generations of Mexican people to pay for the inefficiency of the federal government and the greed of Mexican bankers."

The measure, which passed 325-159 in the Chamber of Deputies and 93-10, in the Senate, establishes a formula for the government to assume more than 600 billion pesos (US$60.6 billion) in FOBAPROA liabilities. In his original proposal, President Ernesto Zedillo had recommended that FOBAPROA liabilities be converted into public debt (SourceMex, 04/15/98). However, legislators later modified the proposal because of opposition from the PAN. Under the plan approved this month, FOBAPROA liabilities will be financed each year as a separate category in the federal budget.

As part of the FOBAPROA initiative, legislators also agreed to establish a program to aid small-scale debtors who have managed to keep up with their debt payments despite soaring costs. The program will benefit small and medium- sized businesses and borrowers with agricultural, mortgage, and other loans.

In addition, the FOBAPROA legislation created an independent agency, the Instituto para la Proteccion del Ahorro Bancario (IPAB), to replace FOBAPROA. IPAB will insure deposits equivalent to 400,000 unidades de inversion (UDIs). UDIs are inflation-indexed instruments worth about two pesos (US$0.20) each.

PAN drops demand for resignation of central bank governor In a compromise with the PAN, President Zedillo and PRI legislators agreed that Guillermo Ortiz, the chief governor at the Banco de Mexico (central bank) would not sit on the IPAB board. Until the FOBAPROA vote in December, the PAN had insisted on Ortiz's resignation as a condition for supporting any measure to bail out the bank-rescue fund. The PAN and the PRD had accused Ortiz of violating Mexican laws when he helped create FOBAPROA in 1995.

Some political analysts raised the possibility that Ortiz may be pressured to step down from his post sometime in 1999.

"The PAN was not able to secure Ortiz's immediate resignation," said political scientist Jose Antonio Crespo.

"Even so, people assume Ortiz will resign in a few months."

But the PAN's decision to back down on its demand for Ortiz's resignation and its support for the bank-rescue plan could have a high political cost for the center-right party.

Political observers said the party is perceived as either caving in to the PRI or abandoning its principles to gain a favorable treatment from the PRI-led federal government in upcoming elections. Following the FOBAPROA vote, Sen.

Rosalbina Garavito of the PRD suggested that the PAN move was designed to gain a favorable position for its potential candidate Vicente Fox in the 20002 presidential elections.

But Deputy Santiago Creel defended the PAN's stance, saying his party decided to support the FOBAPROA rescue plan to prevent a financial crisis.

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