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Prelude to Disaster
José López Portillo and the Crash of 1976

National Security Archive Electronic Briefing Book No. 115

Edited by Kate Doyle

March 14, 2004

This new Electronic Briefing Book is based on a collaboration between Proceso magazine and the National Security Archive and launched on March 2, 2003.

The collaboration grew out of a shared desire to publish and disseminate to a wide audience newly-declassified documents about the United States and Mexico. Each month, Proceso magazine will publish an article by the Archive's Mexico Project director, Kate Doyle, examining new documentary evidence on a chosen topic. The series - called Archivos Abiertos (or, Open Archive), will draw from U.S. and Mexican declassified records on a range of issues that could include, for example: drug trafficking and counternarcotics policy, Mexican presidential elections, human rights cases, immigration, U.S. training of the Mexican military, NAFTA negotiations, the role of the press, peso devaluations, and state repression during Mexico's "dirty war." On the same day that Proceso's article appears in Mexico, the National Security Archive will post an Electronic Briefing Book on its web site, containing an English-language version of the article, a link to Proceso's web site, and all of the declassified documents used for the piece, reproduced in their entirety.

 
 
 
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Prelude to Disaster
José López Portillo and the Crash of 1976

by Kate Doyle

The death of former President José López Portillo on February 17 unleashed a torrent of public rage and bitter obituaries in the Mexican press. The most prominent opinion makers called him a Machiavelli, a megalomaniac, a gambler, a disaster; mere hours after he passed away, politicians were lining up before the television cameras to offer scathing critiques of his government, his personality. He did not receive a State funeral.

The anger stemmed not only from the actions - or inactions - of López Portillo during his sexenio. Yes, he squandered the wealth of the country's newly discovered oil reserves through mismanagement and corruption. Yes, he engineered the perpetuation of the PRI's "perfect dictatorship," while masquerading as a political reformer. Yes, he led Mexico by the nose into the most spectacular economic failure of the western hemisphere at the time, with fiscal policies that culminated in the country's humiliating bankruptcy and debt crisis of 1982.

But López Portillo also had the singular misfortune of donning the presidential sash of a nation already on the brink of economic and political crisis. Through his own flaws he came to personify what were in fact deeper, mostly hidden cracks emerging in the regime's structure. Thus he has come to represent more than the sum total of his regime's bad management and stupid decisions - JLP is a symbol for the end of prosperity as Mexicans once knew it, and the inauguration of a prolonged disaster that continues to resonate in Mexico today.

The political crisis of the JLP era has its roots in the policies of repression promoted by Díaz Ordaz and Luis Echeverría; but the first signs of real economic trouble came in 1976, when the fragility of Mexico's financial system was exposed by the devaluation of the peso and the debt crisis that followed. We know today that 1976 was only a prelude to the real crisis, an ominous warning of what was soon to come. It signaled the end of Mexico's "economic miracle"- the decay of the country's industrial plant, the failure of import substitution to stimulate domestic production, the sustained political resistance to carrying out tax reform, and the regime's increasing reliance on foreign borrowing to promote growth.

For this month's article, Archivos Abiertos takes advantage of a set of extraordinary documents - most of them held in the Gerald R. Ford presidential library in Ann Arbor, Michigan, others obtained through the National Security Archive's Freedom of Information Act requests - to explore the crash of '76. The documents offer a rare look behind the closed doors of Washington's economic policy establishment as it struggled to come to terms with the unraveling of the "Mexican miracle." They also help explain some of the shock and rage felt by Mexicans today when they recall the sexenio of a man who presided over the country's economic undoing.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

The evaporation of Mexico's economic miracle stunned not only the Mexican public, but also even the most seasoned analysts of the Mexican economy. Although the peso's over-valuation was increasingly obvious during Echeverría's last year in office, many observers assumed that that the regime would continue its costly foreign borrowing in the hope that oil revenues would eventually correct the country's enormous trade imbalances and stabilize the economy.

The profligate domestic spending program of the Echeverría government, aided and abetted by López Portillo's Finance Ministry, had sent inflation spiraling into the high double digits and sparked an unprecedented wave of capital flight, as the private sector sought to protect its profits. When the peso was finally allowed to "float" in late August 1976, it went into a rapid free-fall.

United States opinion of the man who would succeed Echeverría was generally upbeat at the time, although they had only a sketchy understanding of his style or his policies. Shortly after he took office, the State Department's Bureau of Intelligence and Research wrote a secret report on the new President that emphasized the positive: "López Portillo brings a variety of experience and skills to the job. A former professor and Secretary of Finance, he is an intellectual, a pragmatic, and a skilled administrator whose personal style is to stress reason and compromise rather than rhetoric and ideology."

In response to the economic chaos created by the devaluation, the U.S. government put together a rescue package of funds from the Treasury Department and the Federal Reserve Bank, and supported the International Monetary Fund in designing a stabilization program and $1.2 billion loan for Mexico, the country's first in almost two decades.

Capital flight began to accelerate as the Echeverría administration entered its final months and market anxieties rose with the country's inflation rate. In early April 1976, Miguel Mancera Aguayo, then Deputy Director of the Bank of Mexico [ANTONIO], contacted the Federal Reserve to request a drawdown of the full $360 million available to it under its swap arrangement with the Fed. The move was intended to counter the rapid dwindling of Mexico's foreign reserves that was underway, as depositors scrambled to take millions of dollars out of the country daily, a flight of capital fueled by fear and increasingly untenable government policies.

The Federal Reserve considered the request briefly and agreed to the swap the next day. In addition to the repeated assurances they had received from senior economic officials about the government's intention to slow the outflow of capital by bolstering market confidence, they looked to the incoming López Portillo administration to adopt the tougher measures required to improve the economy.

"For the longer run," wrote Mexico expert Yves Maroni of the Fed's International Finance Division in a study of economic developments in Mexico dated April 14, "there are reasons for somewhat more optimism. A new Administration will take office in December, following the expected election of former Finance Minister José López Portillo as President in July. The change in Administration may be the occasion for the adoption of stronger anti-inflationary measures if, as seems likely, the new President's Finance Ministry experience leads him to attach more importance than his predecessor to the financial consequences of his political decisions."

It wasn't only the Fed that was optimistic. The Treasury Department also considered Mexico generally sound. That misunderstanding was based in part on its ignorance about how the Echeverría administration was managing the economy. It was also a misreading of the happy face Mexican officials were putting on the mounting crisis in conversations with U.S. officials. The United States was all too willing to believe what it wanted to believe - that all was well.

When Treasury Secretary William Simon traveled to Latin America in May 1976 to discuss U.S. economic ties with Chile, Brazil and Mexico, Mexican Finance Minister Mario Beteta and other officials easily convinced him of their fiscal prudence. He described his talks in a memo to President Ford:

The Mexican officials explained to me the measures they are taking to bring public sector spending under better control. This, along with limiting wage increases, is the key to Mexico's current economic program. They indicated that the increase in public sector expenditures had slowed, revenues had risen and the budget deficit had been reduced in the first four months of 1976. [. . .] I believe the Mexican government knows what needs to be done economically, and I think the prospects are good for a significant reduction in the level of inflation and in the current account deficit.

The bubble burst on August 31, when the government - reeling from an unprecedented capital outflow that it had been unable to staunch - permitted the peso to "float" against the dollar. Echeverría was forced to repeat the float two months later, and the peso dropped to half of its original value, causing havoc in Mexico's private sector. The tempered optimism among U.S. circles after the first float sank to gloom as the reality of what now faced the country sank in: severe austerity measures, drastically reduced public spending, a freeze on wage increases. CIA produced a dark analysis of developments in Mexico, stamped secret ("DESTROY WITHIN 90 DAYS") and dated October 30:

President Echeverría has lost the confidence not only of the business sector as such but also of virtually everyone who has savings in Mexico. It is not believed that Echeverría can restore any degree of confidence and therefore stabilization cannot become effective as long as he remains in office. [. . .] In the final analysis, some form of stabilization must work, the only alternative being a rigid dictatorship which would impose its policies by force as in the Soviet Bloc. We do not foresee this for Mexico within the time frame of the next several years, but we do expect further deterioration and high inflation. [. . .]

Although López Portillo was on the campaign trail and resolutely silent about the devaluation, the agency pointed out that he was certainly talking to the President:

López Portillo's private secretary insists his boss is not exerting any influence at this time. López Portillo is quoted as saying that Echeverría's authority must not be diluted and that he, López Portillo, does not want a piece of an action which he cannot control. On the other hand, Echeverría and López Portillo have several private meetings each week, and it is difficult to imagine that there would be no give-and-take during these get-togethers.

On November 16, members of the Federal Reserve met in secret to discuss what they called "the Mexican situation." Chairman of the Federal Reserve Board, Arthur Burns, opened the session with a rueful explanation as to why the Fed had agreed to the swap of $360 million in April, without foreseeing the devaluation to come.

"The original loan to Mexico of $360 million was not made by us with due deliberation, with due care. We acted, I think, a little mechanically," Burns commented. "The fact of the matter is that we were poorly informed about Mexico's financial condition, and I'm not proud of the way in which we conducted ourselves."

The repercussions of refusing to aid Mexico were, however, dangerous, said Burns. Not only were U.S. private banks highly vulnerable through their loans Mexico (which, by November, were estimated to be in the neighborhood of about $12-$15 billion), but in the event that Mexico might be forced to halt payments, a move that might ripple around the globe with lasting damage to the world economy.

Burns: Now I haven't found anyone who anticipated a depreciation of the Mexican peso of 50 percent or over. The financial policies conducted by that country have been scandalous; we were inadequately informed. [. . .] The long and the short of it is that Mexico may be very close to bankruptcy. I mean by that the enormous foreign debts Mexico has contracted - it is by no means clear that Mexico will be able to service those debts and the moratorium may need to be declared. [. . .] Now that would be a most unfortunate development because our banks are heavily involved in lending to Mexico. And of course it could set off moratoria elsewhere around the world.

With the advice of an internal subcommittee of members designated to negotiate the details of the U.S. loan package to Mexico, the Fed agreed to provide up to $150 million, matching another $150 million from the Treasury.

Burns: Now you might wonder why we should make a loan in a case of a country the prospects of which are so gloomy. [. . .] The factor that led me finally to conclude that it was desirable - I believe that other members of the sub-committee were governed by similar thoughts - was that if Mexico were to declare a moratorium in the near future, having received no help at all from this central bank, then we would inevitably share a certain responsibility for the collapse and for the difficulties that would be caused to our commercial banks. [. . .] But there is - a new government will come into power and that of course influenced our thinking to a degree and if a reflow of capital took place Mexico could straighten out its affairs; if a reflow doesn't take place then I am afraid Mexico will go down the drain.

Although little was known about the incoming President, the Fed looked to his inauguration with anticipation, hoping for relief from the Echeverría's unwillingness to adopt the austerity measures considered necessary to reverse the tide. Henry C. Wallich, member of the Board of Governors and a negotiator on the Fed's Mexico subcommittee, described that hope, perversely citing López Portillo's experience as Finance Minister as reason for optimism.

Wallich: Now as to the future, the Chairman has described the situation, a new government is coming in and the President López Portillo is a former Finance Minister. It is hoped that he will inspire confidence. His views are not 100 percent known and there is some apprehension [that] they might lean in the direction of agricultural reform and other things that would certainly not add to confidence. [But] the [International Monetary] Fund thinks that the situation is manageable, if they decide to do the right things, that is, cut down on government expenditures and keep wages from rising unreasonably. On both fronts so far they have not performed very well.

Members of the Fed remained concerned about the exposure of the U.S. private banking sector in Mexico, and the possible interpretation by commercial banks of the Board's willingness to intervene in the crisis. Philip E. Coldwell of the Dallas Federal Reserve Bank, raised the issue with the Chairman:

Coldwell: Was there a consideration that our participation as an official body might have encouraged other people to lend?

Burns: No, no, oh no, but - well, we thought long and hard about that and the last thing we would have wanted to do or did do was to give Mexico a loan and have Mexico use that as a basis for borrowing from the commercial banks and therefore be indirectly responsible for drawing in the commercial banks. We did not fall into any such trap.[. . .] We could advise the banks to - and we could advise them strongly - to cut back on their foreign lending. If we did that we run the risk [of provoking] the very crisis in international finance that we are seeking to prevent. I'm not talking about Mexico; I'm talking about all around because our banks have in my judgment been rather imprudent once again in lending abroad. [. . .] In some meetings with private bankers I tried to deal with the question lightly and indicated this is an area that bankers must consider carefully. [. . .] I have never said to anyone - to answer your question specifically - that banks should not lend to Mexico. I haven't singled out Mexico.

Paul Volcker, president of the Federal Reserve Bank of New York and soon to become Chairman of the Fed - where he would preside over the 1982 crisis - was given the last word during the meeting. He explained that the Mexican crash took place within the context of broader financial strains worldwide, as the United States and other nations struggled with global recession.

Volcker: I think what we are seeing here is the symptom of general strains and tensions around the world that are going to be difficult to manage. They will be difficult in this case, they may be difficult in other cases, and I fell strongly there is nothing we can walk away from and we will be called upon from time to time for this kind of difficult operation - in Mexico, in this case - maybe there won't be any others, but I suspect there could be. It seems to me a very modest kind of effort on our part. [. . .]

Burns: I would second that comment - that it's a situation we can't walk away from.

The decision to devalue fatally undermined the credibility of the Echeverría administration, which had made repeated public assurances that there would be no devaluation. In the wake of the float, it was clear that Echeverría was also unwilling to implement the austerity policies required to stabilize the country's fiscal standing. As Robert Hormats, an economic analyst on the staff of President Gerald Ford's National Security Council, pointed out two weeks after the devaluation, "The measure can only improve Mexico's international economic position if followed by appropriate corrective domestic policies. But such policies do not appear to have been devised as yet. The burden will fall on President-elect López Portillo."

It was a burden the López Portillo could not bear. He proved incapable of marshalling the political and economic courage required to stabilize the country. By the time he left office six years later, Washington's opinion of the "skilled administrator" had plummeted into dismay and open contempt. Reviewing his most spectacular failure - the collapse of the Mexican economy - the CIA could barely contain its disgust in describing the contribution that the former President made to the country's near-bankruptcy. In a secret intelligence assessment produced just over a year after Miguel de la Madrid took office ("The Outlook for Mexico," April 25, 1984), the agency observed:

Pressures on former President López Portillo to increase public spending became irresistible after Mexico became a net oil exporter, but the former President's tendency toward grandiose scheming contributed significantly to the disastrous boom and bust cycle that followed. [. . .] Virtually all social and economic groups have had to accept declining standards of living, scale down their expectations, and compete for benefits and opportunities in a negative sum economic environment. De la Madrid has struggled to preserve social equilibrium and to restore public confidence in the political system. In particular, he has endeavored to distance himself from the egregious corruption and failures of López Portillo and other senior officials of the last government.

The legacy would outlive the man, as the cascade of negative obituaries in the Mexican press would prove after he died last month.


Note: The following documents are in PDF format.
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Documents

Document 1
September 23, 1975
Supplementary Bio Data on José López-Portillo, PRI's Candidate for Presidency of Mexico
U.S. Embassy in Mexico, confidential cable

In a biographical sketch of López Portillo, the Embassy concedes that as Secretary of Treasury under President Luis Echeverría, López Portillo "did not use his personal influence with the president sufficiently to oppose the deficit spending in this administration," which led to high rates of inflation. Nevertheless, embassy officials remain confident that the new candidate will be a capable leader.

Source: Released to National Security Archive under the Freedom of Information Act
FOIA Request No. 19138, released March 1999

Document 2
September 24, 1975
Echeverría's Probable Successor: INR Special Analysis
State Department Bureau of Intelligence and Research, confidential cable

The Bureau of Intelligence and Research (INR) offers a brief, positive analysis of the "surprise choice" of the Institutional Revolutionary Party (PRI) for the next president. José López Portillo, the INR predicts, will largely follow in his predecessor's footsteps, "using monetary and fiscal policies to achieve long-range goals of social betterment and economic development."

Source: Released to National Security Archive under the Freedom of Information Act
FOIA Request No. 19138, released March 1999

Document 3
September 30, 1975
Why López Portillo?
U.S. Embassy in Mexico, confidential cable

With infighting plaguing several possible PRI candidates for the upcoming presidential election, Echeverría decided to name his old friend and Finance Minister José López Portillo. In scrutinizing the reasons for his choice, the Embassy opines that Echeverría sought, first and foremost, the "maintenance of unity within the political elite." The cable considers JLP likely to seek to change the underlying inequities of the Mexican system, but warns that "serious efforts by the next administration to effect real change in the system and to narrow the gap between Mexico's privileged and underprivileged classes, would inevitably produce some kind of friction, turmoil and resistance on the part of those with most to lose. "

Source: Released to National Security Archive under the Freedom of Information Act
FOIA Request No. 19138, released March 1999

Document 4
April 8, 1976
Request for $360 Million Swap Drawing by Bank of Mexico
Federal Reserve Bank of New York, confidential memorandum

As Echeverría's tenure draws to a close, investors are jittery over increased capital flight, dwindling national reserves, and rumors of an imminent peso devaluation. Nevertheless, in this memo economic analyst Scott E. Pardee of the Federal Reserve Bank of New York accepts reassurances from Bank of Mexico officials that the crisis is "manageable" and that "there is no reason for the peso to be devalued." After a brief internal consultation, the Fed decides to approve Mexico's request to draw down the full $360 million available under its swap arrangement with the Federal Reserve.

Source: Gerald R. Ford Library
Released May 1995

Document 5
April 14, 1976
Recent Economic and Financial Developments in Mexico and Prospects for 1976-77
Federal Reserve Board, restricted report

This report, prepared just after the approval of the $360 million loan, points out the tell-tale signs of economic trouble on the horizon. The past two years in Mexico have witnessed a slowed growth rate, rising rates of inflation, increased public spending, and a decline in exports, offset only by the rise in petroleum exports. Yet the incoming administration of López Portillo is seen as a reason for optimism. As a former finance minister, López Portillo may be expected to "attach more importance than his predecessor to the financial consequences of his political decisions."

Source: Gerald R. Ford Library
Released May 1995

Document 6
May 24, 1976
Trip to Chile, Brazil and Mexico
Secretary of the Treasury, eyes only memorandum

Treasury Secretary William E. Simon returns from a trip to Mexico, Chile and Brazil "optimistic" about the future economic prospects for Latin America. Despite continued rumors in Mexico of an imminent peso devaluation, Simon tells President Gerald Ford in this memo that the Mexican government "knows what needs to be done economically" and sees Mexico's new status as an oil exporter as a herald of better times to come.

Source: Gerald R. Ford Library
Released October 1993

Document 7
September 14, 1976
The Mexican Float - Many Unanswered Questions
National Security Council, memorandum

Two weeks after Echeverría's decision to permit the peso to float, the repercussions of the devaluation are beginning to sink in. National Security Council analyst Robert Hormats notes that upon assuming office López Portillo will need to impose austerity measures with a firm hand: "Insufficient control will simply re-create the conditions which lead to the crisis." These tough measures, such as holding down wages, will inevitably strain López Portillo's first months in office, warns Hormats, and may eventually swell immigration to the United States.

Source: Gerald R. Ford Library

Document 8
September 20, 1976
Financial Arrangements with Mexico
Secretary of the Treasury, memorandum

As Mexican foreign exchange reserves continue to plummet, the U.S. Treasury and Federal Reserve approve an additional $600 million in loans to stabilize the economy until the International Monetary Fund (IMF) can supply Mexico with credit. The crisis will inevitably make the next few years difficult: "The necessary adjustments will not be easy, and there will be individuals and sectors of the Mexican economy who will be hurt in the process." The Treasury hopes these additional funds will serve as a buffer against the internal political pressures that may threaten to destabilize the new administration.

Source: Gerald R. Ford Library

Document 9
October 8, 1976
Comments on the Mexican Program in the Light of Recent Developments
Federal Reserve Board, restricted report

The economic situation in Mexico deteriorates, beset by general panic, runs on the bank, and public fury at the Echeverría administration for devaluing the peso after repeated assurances to the contrary. Although Mexico has now negotiated a three-year plan with the IMF, this will only begin to take effect after López Portillo assumes office on January first. "Apparently, outgoing president Echeverría was willing to take the blame for the devaluation, but not for the austerity measures which the situation requires," writes Fed analyst and Mexico expert Yves Maroni.

Source: Gerald R. Ford Library

Document 10
October 26, 1976
Views of [excised] that Mexico's Economic Situation will Continue to Deteriorate
Central Intelligence Agency, [classification excised] intelligence information cable

The CIA station in Mexico City cites sources calling Mexico's economic situation "bleak," noting that the lack of public confidence in the current government is a major problem. Echeverría has handled the situation poorly, the devaluation itself will produce further problems, and the president-elect will enter office politically restrained from taking a hard economic line. "Lopez-Portillo will be able to do little to stop this recession/inflation spiral and his policies to counteract this problem will probably not produce the desired results." The cable predicts that, should López Portillo fail to take strong measures, another devaluation is likely within the next few years.

Source: Gerald R. Ford Library
Released August 1995

Document 11
October 29, 1976
Notes on Meeting on the Mexican Economic Situation
Federal Reserve Board, restricted memorandum

Notes of a meeting between officials of the Federal Reserve, Treasury Department and IMF held on the day of Mexico's second peso devaluation reveal the United States' changing evaluation of the economic situation in Mexico since the crisis began. As one official notes, "he had gone from elation to gloom and was now in the middle." The document captures the limited knowledge the U.S. and IMF had of the situation. As they grope toward an assessment of the crisis, the officials complain of their difficulty in obtaining reliable information from the Mexican government: "At the meeting, it was generally agreed that everyone had received glowing reports on what was happening on the fiscal policy front, but no one had any specifics."

Source: Gerald R. Ford Library
Released April 1996

Document 12
October 30, 1976
Mexican Economic Situation
Central Intelligence Agency, secret memorandum

This document captures the way the peculiarities of the Mexican political system can exacerbate economic crisis. Economic policy, "like any other policy," is determined directly by the President. Yet by now Echeverría has lost all credibility and will not be able to stabilize the economy before leaving office. Any substantive measures will thus be left to López Portillo, yet the art of presidential transition requires him to maintain a low profile. "Lopez-Portillo is quoted as saying that Echeverría's authority must not be diluted and that he, Lopez-Portillo, does not want a piece of an action which he cannot control." Consequently, whatever real communication takes place between the outgoing and incoming presidents is hidden from the public eye.

Source: Gerald R. Ford Library

Document 13
November 1, 1976
Foreign Exchange Developments in 1976
U.S. Embassy in Mexico, secret cable

In this lengthy cable, the U.S. Embassy evaluates the Bank of Mexico's current foreign reserves, which have dropped by about of $1.3 billion since the beginning of the year. The cable reiterates that one of the key problems faced by U.S. officials in deciding how to respond to the Mexican request for aid has been secrecy. Information on issues such as Bank of Mexico transactions with public enterprises, for example, is "not readily available," and reconciling discrepancies in financial data can only be done "with a major effort."

Source: Gerald R. Ford Library
Released May 1996

Document 14
November 2, 1976
Mexico's External Debt and US Bank Exposure
U.S. Embassy in Mexico, secret cable

In a cable to the Treasury Department, the Embassy's economic attaché estimates that Mexico's external debt now stands at more than $25 billion. Bank of Mexico officials believe that U.S. private banks hold as much as 70 percent of that debt, indicating the extreme vulnerability of U.S. financial institutions to the Mexican crisis.

Source: Gerald R. Ford Library
Released May 1996

Document 15
November 4, 1976
Summary of Recent Information on the Mexican Economic Situation
Federal Reserve Board, restricted memorandum

Reflecting on the possible ramifications of the second peso devaluation, the Fed's Yves Maroni notes that the Echeverría government's increasing impotence and the absence of any information about what steps José López Portillo may take as President have further damaged the economic situation. Although an agreement has been signed between the IMF and the Mexican government which should provide some relief, the existence of the arrangement is not widely known in Mexico, and "ignorance fuels lack of confidence."

Source: Gerald R. Ford Library

Document 16
November 5, 1976
Mexican Swap
Federal Reserve Board, memorandum

As the peso crisis continues, the Federal Reserve Board and the Treasury Department consider whether to approve a joint $300 million loan to the Mexican government. In this memo discussing conditions that may apply to the loan, Henry C. Wallich, head of the Fed's Mexico subcommittee, weighs the impact the Mexican crisis may have on the U.S. banking sector. While Wallich sees no immediate threat, he concedes that there is "a latent and very serious threat" in the background.

Source: Gerald R. Ford Library

Document 17
November 16, 1976
[Discussion of the Mexican Crisis]
Federal Reserve Board, meeting transcript
[Extract: Tape 6]

This informal transcript of a taped secret meeting on the Mexican economic crisis offers a rare glimpse of the discussions held by the Federal Reserve Board as members tried to decide how to act. Chairman of the Federal Reserve Board Arthur Burns, head of the Mexico subcommittee Henry Wallich and president of the Federal Reserve Bank of New York Paul Volcker all weigh in on the Fed's decision to approve loans to Mexico. They concede that the central bank's decision to approve of the $360 million draw down in April was made without adequate information or analysis. The most recent loan of $150 million was approved after more deliberation, considering aspects such as the large debt held by U.S. banks, the possible ripple effects of a Mexican default on loan repayments around the world, and the hope that new President José López Portillo would "inspire confidence."

Source: Gerald R. Ford Library
Released May 1995

Document 18
April 25, 1984
The Outlook for Mexico [extract]
Central Intelligence Agency, secret national intelligence estimate

In striking contrast to Washington's favorable early assessments of López Portillo, this heavily redacted national intelligence estimate of 1984 blasts the former president for his flagrant misuse of oil money, extravagant foreign borrowing, and bloated public spending. Although by the late 1970s the currency was again substantially overvalued, López Portillo "stubbornly refused to devalue the peso until 1982," bringing on the massive financial crisis that effectively forced Mexico to declare its bankruptcy before its foreign lenders.

Source: Available on the CIA Web site, FOIA Electronic Reading Room
Released December 1998

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