United States: Central Bank Swaps to Mexico, 1982

In 1967, the Fed established a standing reciprocal swap line for up to USD 130 million with the Bank of Mexico, renewable on a yearly basis, in recognition of the close economic and financial ties between the two countries. The Fed increased this swap line to USD 700 million in 1979 (Bordo, Humpage, and Schwartz 2014). In 1982, the Fed allowed the Bank of Mexico to draw on this swap facility several times to meet its short-run liquidity needs in the run-up to the crisis. On April 30, 1982, and June 30, 1982, the Fed arranged overnight swaps of USD 600 million and USD 200 million that enabled Mexico to meet its foreign currency reserve target in month-end reports (Kraft 1984; US GAO 1997). (See Figure 3.) On July 30, the Fed lent the Bank of Mexico USD 700 million overnight, the full amount of the standing swap line. On August 4, the Fed again allowed Mexico to draw upon this swap facility for the full amount, but for a duration of three months, to serve as a bridge to IMF funding that would address its larger problems (Kraft 1984).

As this swap facility with the Fed proved insufficient, the US Treasury and the BIS stepped in to aid Mexico in August 1982 (Kraft 1984).

On August 15, 1982, the US Treasury established a temporary, one-week bilateral swap line of up to USD 1 billion with the Bank of Mexico as an emergency step to enable Mexico to make interest payments to banks and other commercial creditors due on August 16, 1982 (Boughton 2001; US Treasury n.d.a). The Bank of Mexico immediately drew USD 825 million on this swap line (Boughton 2001). It repaid this obligation to the US Treasury on August 24, using the proceeds from an advance oil payment from the US Department of Defense (which paid on behalf of the Department. of Energy).

On August 28, 1982, the BIS announced a multilateral financing package worth up to USD 1.85 billion. The US Treasury and Fed disbursed up to USD 925 million through the SCCF, which consisted of bilateral, unidirectional swap lines. The other G-10 central banks, plus the Bank of Spain and the SNB, disbursed the same amount via loans. The purpose of this package was to serve as bridge financing while Mexico negotiated a deal with the IMF (Boughton 2001). (See Figure 4.)

Figure 4: Overview of the BIS-US Aid Package to Mexico in 1982

In the SCCF, the Fed provided a USD 325 million swap line and the US Treasury provided a USD 600 million swap line. These swap facilities were linked to the BIS through cross-payment clauses, “which provided that all payments from Bank of Mexico would be shared equally between the US and BIS” (Boughton 2001). The drawings from the BIS and the US monetary authorities happened on a pari passu basis (Fed 1983a). This package expired on August 23, 1983. Usage of the SCCF was USD 1.17 billion (see Figures 5 and 6 in Key Design Decision No. 8, Size) (Cross 1983a).

The USD 925 million from the BIS came from 11 industrialized countries (Lewis 1982). On September 2, 1982, the Federal Reserve Bank of New York deposited USD 70 million advanced from the BIS into the Bank of Mexico’s account (US GAO 1997). As a precondition, the central banks and the BIS had demanded that a consortium of 500+ commercial banks agree (as banks were responsible for the exacerbation of Mexico’s indebtedness) to roll over their loans to Mexican banks and limit their deposit withdrawal requests, rather than demanding immediate payment (Lewis 1982; US GAO 1997).

Mexico was able to get more time to negotiate the IMF program as major banks decided to forgo repayment of loans worth USD 10 billion that were due in the next 90 days and agreed to lend between USD 500 million and USD 1 billion to Mexico in the following days (Rowe Jr and Atkinson 1982b; US GAO 1997).

In addition to this package, USD 5 billion came from commercial banks and USD 2 billion came as trade credits from 10 industrialized countries to ensure that the adjustment program was adequately financed (Farnsworth 1982). The US provided additional assistance to Mexico and the Fed and Treasury assisted in negotiating aid from third parties The US Treasury was influential in arranging credit worth USD 1 billion to Mexico through the Export-Import Bank and Commodity Credit Corporation of the USDA (Kraft 1984).

On August 14, 1982, Mexico imposed capital controls such as freezing currency bank accounts and banning the transfer of foreign currency outside Mexico and controlled the foreign exchange rate in order to prevent outflow of dollars from the Mexican economy (Dow Jones 1982).

In December 1985, the IMF committed USD 3.75 billion (spread over 3 years) in assistance under its Extended Fund Facility (Boughton 2001).

The Fed is authorized to enter into foreign currency swap agreements based on the authority of Section 14 of the Federal Reserve Act (FRA 1913). Decisions regarding whether to enter into a swap and the terms thereof are made by the Federal Open Market Committee (FOMC) of the Federal Reserve System (Fed n.d.).

The US Treasury operates swap lines through the ESF (US Treasury n.d.b). The swap facilities are administered by the FRBNY, the open market operations arm of the Fed and the fiscal agent for the Treasury (US Treasury n.d.b). The US Code, Section 5302, provides for the Treasury secretary’s use of the ESF:

Consistent with the obligations of the Government in the International Monetary Fund on orderly exchange arrangements and a stable system of exchange rates, the Secretary or an agency designated by the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary. However, a loan or credit to a foreign entity or government of a foreign country may be made for more than 6 months in any 12-month period only if the President gives Congress a written statement that unique or emergency circumstances require the loan or credit be for more than 6 months. (Mulford 1995)

President Ronald Reagan, in a letter to Thomas P. O’Neill, Speaker of the House of Representatives, on September 8, 1982, wrote that he determined on August 24, 1982, that owing to “unique and exigent circumstances,” the US, through the ESF and Department of Defense, would provide to the Bank of Mexico credit with a maturity of longer than six months but not exceeding a year (Reagan 1982). This was the first time that an American president had used the powers under Section 5302 to extend the maturity of loans granted by the ESF beyond six months. The president decided to do this (Mulford 1995; Reagan 1982).

The FOMC is the decision-making body for the Fed’s open market operations (Fed n.d.). The secretary and the deputy secretary of the Treasury were the principal decision makers at Treasury (US GAO 1997). The Fed reported all the swap draws made by the Bank of Mexico from the Fed and Treasury swaps in the 1983 spring issue of the FRBNY Quarterly Review and the 1983­–1984 winter issue of the FRBNY Quarterly Review (Cross 1983a; 1983b).

The BIS portion of the BIS-US package was funded by the G-10 countries along with the Bank of Spain and the SNB (Boughton 2001). The Euro-currency Standing Committee of the BIS authorized the BIS package (Kraft 1984).

Miguel Mancera, then governor of the Bank of Mexico, was among the principal negotiating parties who helped finalize the BIS-US package (Boughton 2001).

Little information is publicly available about the direct management of the swap facilities. The BIS and the Fed worked closely together to ensure that the Bank of Mexico received the aid it needed, subject to its fulfilling certain conditions they imposed (FOMC 1982b). Officials from the Federal Reserve and the US Treasury were heavily involved in monitoring Mexico’s economic and financial conditions during the crisis of 1982 (Kraft 1984).

The swaps under the BIS-US package were extended by the US separately as an entity in conjunction with the short-term credit provided by the BIS. This decision was made as the Fed had a greater degree of flexibility in timing pertaining to making the swap amounts available relative to the BIS loans, which needed some time to be raised in the market (FOMC 1982b).

The US and BIS coordinated with the Bank of Mexico to extend the package in three tranches, on August 28, 1982, in mid-November, and in mid-December (BIS 1983; Boughton 2001). It was reported in a Washington Post article that each tranche would have a duration of three months (Rowe Jr and Atkinson 1982b).

An article from the Washington Post, dated August 21, 1982, mentioned that Mexico had exhausted the USD 700 million payment it received through its reciprocal swap facility with the Fed. It also mentioned that the US made available USD 1 billion in advance payment for Mexican oil on August 16, 1982, and noted that the US had agreed to extend guarantees from the Commodity Credit Corporation for USD 1 billion (Rowe Jr and Atkinson 1982a). Another article from the New York Times from the same date delved into details about the oil deal (Cowan 1982).

A press release from the BIS dated August 29, 1982, was the first official announcement regarding the BIS aid package. It stated that “the agreement provides for drawings on the facility in three tranches in line with progress towards agreement between the Mexican Government and the International Monetary Fund on an economic stabilization program” (Kraft 1984).

The Fed announced its participation in the BIS package on August 30, 1982 (Rowe Jr and Atkinson 1982b). The Record of Policy Actions from the FOMC stated that “the multilateral financing program provided that drawings by Mexico would be made in line with progress toward agreement between the Mexican Government and the International Monetary Fund (IMF) on an economic adjustment program that will permit Mexico to qualify for drawings under the IMF’s Extended Fund Facility” (FOMC 1992).

Although research has not been able to access press releases or announcements from the BoM when the package was announced, it is to be noted that the BoM described in its 1982 annual report that it had secured aid worth USD 1.85 billion from industrialized countries coordinated by the BIS. It stated that Mexico qualified for this aid, despite not being a member of the BIS, and this indicated the faith that the international community had in Mexico’s resilience (BoM 1983).

The Bank of Mexico was the only institution eligible to draw under the standing swap line with the Fed, the temporary bilateral swap line with the Treasury, and the SCCF as the intention of these swaps was to help Mexico with its balance of payments crisis until a package with the IMF was finalized in December 1982 (Fed 1982b; Kraft 1984).

The Bank of Mexico drew upon the standing reciprocal swap facility with the Fed multiple times in 1982^FAlthough the Bank of Mexico did draw upon the standing Fed facility prior to 1982, this case study focuses on 1982. (refer to Figure 3). It had an outstanding amount of USD 373 million on January 31, 1983 (Cross 1983b). On February 28, 1983, the Bank of Mexico repaid USD 373 million (Fed 1983b).

The Bank of Mexico drew USD 825 million on the USD 1 billion temporary, one-week bilateral swap facility that the US Treasury established on August 15, 1982, and repaid this amount on August 24, 1982 (Cross 1983b; US Treasury n.d.a).

The Bank of Mexico also drew on the SCCF extended by the Fed and Treasury as part of the BIS-US package multiple times (see Figure 5 and Figure 6).

Figure 5: Drawings and Repayments under the Temporary Bilateral Swap Line and the SCC

Figure 6: Drawings and Repayments under the SCCF

Funds from drawings under the standing swap facility with the Fed, the temporary bilateral swap facility from the Treasury, and the SCCF were credited to the Bank of Mexico’s account at the FRBNY (FOMC 1992; US GAO 1997). The proceeds from BIS loans were also deposited with the Bank of Mexico account at the FRBNY (Kraft 1984).

The peso holdings of the US monetary authorities (the Fed and Treasury) for the standing swap facility with the Fed and the SCCF were invested in an interest-bearing account at the BoM (Fed 1983a).

The funds that were lent from the reciprocal standing swap line with the Fed were used to provide a reserve cushion, as evidenced by the temporary liquidity needs that the BoM had during the time it borrowed these funds (Fed 1982a).

Our research has not been able to determine the downstream usage of funds borrowed from the temporary bilateral swap line worth USD 1 billion the Treasury had with the BoM.

Although our research has not ascertained how all the borrowed funds from the BIS-US package were utilized, there is evidence that part of the funds from this package were lent to commercial banks. In fact, on September 7, 1982, which was dubbed by Mexicans as “Black Tuesday,” the BIS and other central banks pressured Mexico’s authorities to not use the proceeds of the BIS-US package to repay loans and honor deposit withdrawals at US branches of Mexican banks (Kraft 1984; US GAO 1997).

The standing reciprocal swap facility worth USD 700 million between the Fed and Bank of Mexico was drawn on an overnight basis three times—on April 30, 1982, June 30, 1982, and July 30 1982 (US GAO 1997). The duration of the drawing made from this facility on August 4, 1982 was three months (Kraft 1984, 8).

The swap extended by the US Treasury on August 15, 1982, had a duration of about a week (US GAO 1997).

The swaps extended by the Fed and Treasury in the BIS-US package had a duration of three months (Fed 1982b; FOMC 1982b).

The FOMC minutes from August 1982 state that the swap from the Fed under the BIS package could be rolled over three times, for a total duration of one year (FOMC 1982b).

All the swaps on the Fed swap facility were extended at the Treasury bill rate (FOMC 1982b). No information is available on the interest rate charged on the US Treasury swaps.

The Bank of Mexico paid USD 50 million to the ESF as a negotiating fee for the USD 1 billion temporary swap from the US Treasury through the ESF (US GAO 1997).

The Fed’s standing swap facility required the Bank of Mexico to deposit pesos in the Fed’s account with the Bank of Mexico, to be swapped for the US dollars that the Bank of Mexico borrowed (US GAO 1997).

The United States agreed to provide Mexico up to USD 1 billion under the US Treasury swap via the ESF in exchange for oil for the US Strategic Petroleum Reserve worth up to USD 1.2 billion (US GAO 1997). The Treasury made this decision as Treasury swaps had to be secured (Perry 2020; US GAO 1997). Subsequently, the Treasury arranged for the US Department of Energy to pay USD 1 billion to Mexico as a prepayment for oil imports under a contract with the Department of the Defense for the Strategic Petroleum Reserve. This deal materialized owing to many reasons. Firstly, the Treasury had been contemplating such a deal since July 1982 under its preparedness planning efforts; it had enquired various departments if they would be willing to buy oil from Mexico in the event of an emergency (Kraft 1984; US GAO 1997). The Treasury ascertained on August 13, 1982, that the Department of Energy had genuine demand for Mexican crude. Consequently, the Strategic Petroleum Reserve (whose purchases are made by the Department of Defense) assured the Treasury that it had USD 1 billion in cash that was necessary for the Treasury to move ahead with the swap transaction (Kraft 1984).

This transaction was approved in principle by the Office of Management and Budget (OMB) which required the deal to be justified through the prudent use of taxpayer dollars; as a result, the US initially proposed the purchase of oil from Mexico at USD 28 a barrel, compared to the market price of USD 32 per barrel. Following the rejection of this proposal from the Mexican authorities, representatives from the Mexican government proposed that they would like to receive the USD 1 billion advance payment from the Treasury against a repayment made through the sale of Mexican oil. The Treasury then insisted that the repayment for this loan (swap) be made over the following 15 months, costing the Mexican government USD 1.3 billion. Rejection of this deal led the Treasury to propose a flat negotiation fee of USD 100 million. It was finally agreed by both the parties that the Mexican government would pay a negotiation fee of USD 50 million for this deal (Kraft 1984).

It was decided on August 28, 1982 that the BIS-US package would be collateralized by revenue from the sales of oil from Mexico (as evidenced by oil receipts), starting in August 1983 (Kraft 1984). This protection was imposed to ensure that the lenders would be protected in the event of an IMF deal falling through (FOMC 1982b; Kraft 1984).

The BIS and other central banks pressured Mexico’s authorities to not use the proceeds of the BIS-US package to repay loans and honor deposit withdrawals on September 7, 1982, known as Black Tuesday in Mexico, which witnessed a run on US branches of Mexican banks (Kraft 1984; US GAO 1997).

Following the announcement of nationalization of banks and implementation of exchange controls by President López Portillo on August 31, 1982, Mexican branch banks in New York were hit with extraordinary demands for repayment of loans and withdrawal of deposits on September 7, 1982 (Kraft 1984; US GAO 1997). Given the risks that this unexpected demand posed to the clearinghouse system, Volcker told Mexican authorities to inform the US branches of their banks to not make any further payments (Kraft 1984).

The BIS-US package, including the SCCF and the BIS loans, were extended in three tranches. The first tranche of the BIS-US package was conditional upon Mexico coming up with collateral (which was future oil deliveries) if the IMF negotiations failed (FOMC 1982b; Kraft 1984). The second tranche was made available when it was clear to authorities from the US and BIS that Mexico had made progress toward reaching agreement with the IMF (BIS 1983). The drawing from the third tranche was permitted when the Bank of Mexico and the IMF “reached agreement” on an economic austerity program and the IMF approved a loan to Mexico (BIS 1983; FOMC 1982b).

On November 10, the Mexican finance minister and the BoM governor submitted a Letter of Intent outlining measures of the negotiated austerity program to the IMF. On December 23, 1982, the IMF deal was finalized (Kraft 1984). The IMF package was worth USD 3.75 billion (Farnsworth 1982; IMF 2020).

An advisory committee comprising representatives from 14 banks and headed by William Rhodes, co-chairman of Citibank, convened in August 1982 to assess how creditor banks would coordinate rolling over Mexico’s debt and interest payments, monitoring the interbank system pertaining to Mexico’s involvement and assessing Mexico’s economic conditions. The advisory committee set up several subcommittees that were instrumental in monitoring Mexico’s situation (Kraft 1984).

As the Fed wanted to be assured of a repayment for the extended three-month swap, the secretary of the Treasury by letter to the Fed chairman agreed to back the repayments of any swap drawings the Bank of Mexico made from the Fed swap, in the event that a deal with the IMF could not be reached (US GAO 1997).

The reciprocal swap facility that the Fed had with the Bank of Mexico, worth up to USD 700 million, was renewed annually for the same amount (Cross 1983a; FOMC 1982a; FOMC 1992). The Fed increased this swap facility to USD 3 billion in 1994 and later incorporated it into the permanent trilateral swap facility among Mexico, the US, and Canada under the North American Framework Agreement (US GAO 1997).

The Bank of Mexico repaid the USD 825 million it had drawn on August 16, 1982, on August 24, 1982, using the proceeds from the oil payments advanced by the US Department of Defense (which made the payment on behalf of the Department of Energy) (Boughton 2001; US Treasury n.d.a). This decision was made since Mexico did not have sufficient cash flow to serve as collateral for the swaps from the Treasury, which had to be secured (US GAO 1997).

The US swaps under the BIS package (USD 600 million from the Treasury and USD 325 million from the Fed) expired according to the predetermined end date of August 23, 1983, and the Bank of Mexico repaid all outstanding drawings on this date (Cross 1983a).