How not to privatize

S.P. Chakravarty and Jonathan Williams have a working paper called “Privatisation of Banks in Mexico and the Tequila Crisis.” I’ve read about the problems of bank privatization in Mexico before, but the paper does a good job of detailing what should have been some serious red flags in the process.  For instance:

a. “A successful bidder would use this grace period to source funds from various investors, and sometimes the acquired bank itself. In one case, 75 per cent of the cost of acquiring a privatised bank came from a loan from that bank, for which the collateral was the shares being acquired.”

b. Since the rationale for privatisation and the desire for raising money for the exchequer were not kept separate, the offer was made attractive by signalling to prospective buyers that they could “expect only very limited competition between banks”

c. “Lastly, three banks were acquired by bidder groups that lacked any financial sector experience.”

The authors demonstrate the conflict of interest present when governments are focused so exclusively on maximizing short term revenues.  Specifically, they find in the Mexican case that the “liberalisation process contributed to the subsequent financial crisis entailing the re-nationalisation of banks after a short period of three years at a cost to the exchequer which was five times greater than the money raised at privatization.” Obviously there were a lot of other factors involved in the tequila crisis, but the fragility of the banking sector didn’t help.


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