The Likelihood of Succeed in US Financial Rescue

The Mexican Financial Crisis in 1994 had more negative characteristics than the US Financial Crisis have now; therefore, the likelihood of succeed of an eventual US financial rescue is high (The Mexican recovery was a relatively successful experience).

Mexican crisis was not only a banking system crisis, it was also a exchange rate crisis, a fiscal crisis, private sector crisis and central bank confidence crisis. Mexico find its way to overcome the recession (as conventionally is known), trough out adjustments in the way how the economic agents get financial credit, creating a productive sector more focused in external demand, and changing the financial architecture to recovery the financial health. The process was painful principally because the inflation eased very slowly.

In 1994, the bank system suffered by exchange rate policy failures, affecting all the credit flow toward the economy. The total loan bank portfolio showed a downtrend for ten years after the crisis; from 42% in proportion of GDP in 1994 to 9.8% in 2003. This drove our economy to asymmetric and inequality growth; the prosperity reigned among corporation dedicated to export, and high levels of inflation, benefiting those who were hedging instruments against inflation and affected the purchasing power of the working population. However, the net effect was positive; GDP growth 5% in average in the period 1996-2003 and the levels of employment growth too.

The US economy outlook show differences. The exchange rate pass-trough toward core inflation is not important, the debt levels is not increased exponentially as happened in México (the reference interest rate in México skyrocketed from its lowest point in February 1994 in 9.4% to its peak in November 1995 in 53%); the corporation debt has been well handle and not liked to other curries and they have been succeeded in the incursion of international markets.

What we will see in US economy is changes in the credit behavior of its economic agents; enterprises will use more interfirm credit (as usual in Mexico) and the consumers will adjust the way how they finance their purchases; the financial sector will become more small; and an important source of growth will be exportations (as the last quarters). At the end US economy will recovery and it will show sustainable growth rates in line with an adequate growth in all its sectors; including high levels of employment.