Peso Crisis: Battening Down to Focus on Long Haul

The Mexican financial crisis does not appear to have dampened the enthusiasm of U.S. companies seeking to export their credit expertise.

While Congress and President Clinton were dueling over loan guarantees, the prospective exporters, including card processors and credit bureaus, said they were focusing on what they have always regarded as a long-term objective.

Mexico is and will remain a booming financial services market, they said. Its development of an advanced consumer economy will take years - a fact underlined by the recent peso devaluation - and the U.S. credit providers always said they were entering Mexico for the long haul.

"Most people are assuming that this is a short-term crisis," said Stewart A.C. Stockdale, MasterCard vice president for Latin America.

"What has changed in the short term is the value of the peso, but the long-term prospects that attracted us initially (to Mexico) have not changed," said a spokesman for Household International, which established a joint venture in Mexico with Banco Mexicano to issue cobranded credit cards.

That type of long-term optimism is shared by the Mexican banking community. Even as the peso was falling, the bankers expressed faith that the problems would not last. The prevailing attitude seemed to be that Mexico has been through crises before and this latest one would not stop progress.

Credit card issuers are cautiously forging ahead with marketing and product development plans for cards and other credit products, though many have tightened extensions of new credit.

Some issuers are also considering a reduction in existing credit lines, or will only extend new credit to higher-income consumers with strong credit histories.

The $20 billion in loan guarantees promised by President Clinton may help restore confidence in Mexico's financial markets, but interest rates were not expected to come down immediately.

Credit card interest rates, historically influenced by high inflation rates, have been hovering between 57% and 65%, up from about 40% four weeks ago.

"Prices go up quickly, but they are slow to come down," said Luis Ramirez, vice president of research and development for credit cards at Banamex, Mexico's largest credit card issuer.

Mr. Ramirez said Banamex will lower its interest rate, currently 60%, in a series of adjustments likely to begin at the end of February.

The Mexico City-based bank is also considering paring down some of its customers' credit lines. A typical line of credit is about $1,000, and Banamex might reduce some to $500.

Banamex's primary concern, Mr. Ramirez said, is customers who are already delinquent. While it is still too early to determine whether the higher interest rates have affected Mexican consumers' ability to pay their debts, Banamex expects that people who couldn't pay at the lower rates will find it impossible to do so at higher rates.

Banamex is notifying those customers with an offer of easier repayment terms.

Mr. Ramirez sees a competition brewing among the bank card issuers collecting on past-due accounts.

"The idea is to get to those people quickly," because they probably have debts with other banks who will be contacting them as well, the Banamex official said.

Banamex and its competitors are looking at ways to help consumers repay their outstanding credit card debts.

A number of institutions are developing debt negotiation programs, said Mr. Stockdale, who has also observed an increased interest in lower-risk secured cards and debit products.

About 10 million Mexican consumers have credit cards, and by one estimate total outstanding debt could be as high as $20 billion.

James Partridge, president of Visa's Latin America region, predicts that delinquencies will be very high. Moreover, he said, banks will need to charge higher interest rates to compensate for the inevitable chargeoffs.

Still, some industry experts believe it is premature to speculate about how the higher interest rates will affect consumer spending and borrowing habits.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER