Mexico's economic crisis began hitting home last week for U.S. banks.
Unauthorized trading in the rapidly falling Mexican peso left Chemical Banking Corp. with a $70 million foreign exchange loss. Other banks, meanwhile, worried about possible liquidity shortages in Mexico and what it might mean for their own exposure. TRENDLINE
In the wake of the peso's 50% devaluation since Dec. 20, bankers have been quick to note that lending to Mexican borrowers has been limited for several years. And most of the loans, bankers say, have gone to Mexican companies with revenues denominated in dollars.
But loans are not the only risk. Banks could still take big hits on Mexican government bonds. Banks swapped billions of dollars in loans for Mexican securities, or "Brady bonds," several years ago in the first of a series of such debt swaps with other developing countries.
Mexican Brady bonds fell by more than 23% in 1994, with most of the drop coming in the fourth quarter.
Analysts said the coming weeks could show just how much has been lost by banks holding large quantities of such securities. They also warn that investor lack of confidence in Mexico could dash the hopes of U.S. bankers' looking to expand capital market and investment banking business in Latin America.
Some banks are taking an active role in stabilizing Mexico. Citicorp and J.P. Morgan & Co. agreed last week to lead a $3 billion credit facility from U.S. and international banks.
But many observers fear that more turmoil lies ahead for Mexico. Indeed, some Wall Street analysts are questioning the soundness of the new credit facility.
So far, Mexican President Ernesto Zedillo has failed to come up with a credible plan to restore foreign investors' confidence, reverse capital flight from the country, and reduce Mexico's $30 billion trade deficit.
"There's probably not much risk in the short run, but what happens if Mexico continues to have liquidity problems?," asks Raphael Soifer, a banking analyst with Brown Brothers Harriman.