The Mexican debt crisis redux: international interbank markets and financial crisis, 1977–1982

Abstract

The international banking crisis that began in 2007 has brought the relationship between international banking activities and financial crises to the forefront. The growing reliance on foreign interbank funding by domestic banks has been recognized as a crucial factor in explaining the banking and sovereign debt crisis currently affecting several peripheral European countries. This article shows that the link between financial crisis and international interbank lending is not a new phenomenon; a similar trend can be observed in the Mexican banking sector during the run-up to its 1982 debt crisis. I explore the international activities of Mexican commercial banks in the years preceding the country's default and demonstrate that they became involved in international lending which was funded largely through heavy short-term interbank foreign borrowing. I provide new archival evidence which shows that in intermediating foreign finance with local public and private borrowers, Mexican banks incurred maturity, interest rate and currency mismatches and dangerously increased their risk position. This article provides insights for understanding the Mexican debt crisis as closely intertwined with problems in the domestic banking sector, which were, in turn, linked to its involvement in the international financial system.