"The Mexican Financial System Is At Risk: Nomi Prins (Exclusive Interview)"

Nomi Prins
(Foto: Ixbalanqué Danell, Diseñador y fotógrafo)

The Inteligencia Financiera Global Blog (Global Financial Intelligence Blog) is proud to present this exclusive interview with Nomi Prins. Nomi is a renowned journalist, author of books like “All the Presidents’ Bankers” and speaker. She has appeared on numerous TV programs for BBC, RtTV, CNN, CNBC, etc.
She has featured in numerous documentaries shot by international production companies, alongside prominent thought-leaders, and Nobel Prize winners.
Guillermo Barba interviewed Nomi Prins last week in Mexico City.
Thanks for accepting this interview, Nomi.
Guillermo Barba (GB): Welcome to this country. Please tell me, why did you come to Mexico this time?
Nomi Prins (NP): I came to Mexico City to give a talk on “US Elections: Economic Policy and Global Financial Implications” on behalf of the Aspen Institute, Mexico and Unifimex. I had spoken at their invitation last August regarding US interest rates, The Federal Reserve, what The Bank of Mexico might do, and how that could effect the Peso and markets. A few years ago, I addressed the Mexican Senate on the problems of “too big to fail” and the high concentration of foreign banks in Mexico. I’ve been following the political and economic relationship between our two countries for some time, including in my book, All the Presidents’ Bankers (particularly the Bill Clinton chapter). Next week, I will be speaking at the Tecnologico de Monterrey in Guadalajara on Trends in Global Banking and Financial Markets. 
GB: How is the political process in the US going to affect Mexico, politically, economically, and financially speaking?
NP: First, regardless of politics, there has been slower real economic growth in The United States then headline GDP figures suggest and this will be the case going forward. Thus possibility for new QE activities in the event of this slow growth remains likely. Even though The Federal Reserve, raised rates in December by 25 basis points – this was not a sign of confidence in the US economy – but an action to indicate that they can if they want to – nor was it indicative of a shift to a tightening policy. Plus financial markets are so dependent on cheap money globally that raising rates even by 25 basis points caused extreme disarray, and was followed by counteractions from the ECB and Bank of Japan. The Bank of Mexico copied The Federal Reserve and also raised rates by 25 basis points. The result for both countries, has been a decline in the stock market and banking sectors in particular. The added result for Mexico, was further devaluation in the Peso and thus lower profits from exports and higher costs for imports to local people and businesses.
Politically, there are several ways in which Mexico will be impacted by our elections depending on who wins. Take the Democrats, the competition between Bernie Sanders and Hilary Clinton is fierce, and Hillary who once looked like a clear frontrunner is in a real fight with Bernie whose support has only been accelerating in numbers and financial contributions. If Hillary does win the nomination and the presidency, the relationship and finances between Mexico and the US will not likely see much change. Bill Clinton pushed NAFTA through which largely benefitted the US banking system and larger companies trading with Mexico. It also resulted in greater foreign bank concentration in Mexico and few smaller banks in the financial sector. None of that would change under Hillary. With Bernie, the potential for change is greater. He campaigned, even demonstrated against NAFTA at the time, and very much believes in better conditions and pay for workers in the US and by extension, everywhere. He also believe in breaking up the big banks. If he wins the nomination and presidency and manages to accomplish doing that in the US (by bringing back a modern day Glass Steagall) then by extension, Mexico might be inclined to do the same thing, or at least, see the risk imposed by the high concentration of foreign banks decline. So Bernie would be good for workers and small and mid-sized businesses in Mexico.
Now, let’s look at the Republicans and the battle between Donald Trump, Ted Cruz, Marco Rubio and Jed Bush – I don’t really count the rest of them, John Kasich has had some good showings and is the most moderate Republican, but he doesn’t have the financial backing to keep a competitive race going. Ben Carson is likely to bow out soon. Donald Trump would be a disaster for Mexico, and no Mexican I have spoken with has said otherwise. The idea of building a bigger wall and having Mexico pay for it is economically illogical and juvenile. It also shows supreme lack of knowledge of the situation – there have been more Mexicans and Americans moving to Mexico from the US than the other way around. His brand of racism is dangerous to economic and trade relations between our two countries. The other three contenders would largely make some noise on the non-existent immigration problem, but it would be less contentious and thus less dangerous. Still, none of them has indicated knowledge that enhancing working conditions for people on both sides of our border, creates stronger trade on both sides, which creates stronger economies on both sides. So I don’t believe any of them would be particularly good for Mexico.
GB: Mexican politicians say that the Mexican economy is strong and that external issues won’t affect Mexico’s “strong fundamentals”, do you agree?
NP: No. Politicians are obligated to speak like that. But, there’s no such thing as an independent country in a global financial environment with fast moving speculative capital constantly seeking the next big bet. Some countries will do better than others of course, but the recent projection of a 2.5% growth in GDP for Mexico, is not a lot, particularly if you compare that figure to concurrent Peso devaluation. We’ve just passed 19 (Pesos to a Dollar) on the exchange rate. This has a significant dampening growth impact on Mexico and its relationship to The United States from a trade perspective. The other thing that’s happened with Mexico, is that the decline in oil prices has had, and will continue to have, a negative effect because we have a global oil environment, in which Mexican’s oil companies, Pemex in particular and associated businesses, are impacted by real and speculative price movements. Mexico’s oil exports to The United States have declined because there’s less demand for oil. Revenues in Mexico from exporting oil are down due to demand and currency devaluation. This will continue to have a negative impact. You can’t just take Mexico out of the (world) equation.
The other problem is that the concentration of foreign-owned banks in Mexico remains incredibly high. Four of the top five banks in Mexico are foreign-owned and together the top five control 68% of financial assets in Mexico. Mexico’s foreign ownership concentration is higher than in any other country in the world. That’s not new, but the problem is, whenever there is a crisis, foreign banks can and will retract their capital back to their home country. Mexico has been attractive to both speculative and longer-term investment. But the speculative capital exits very quickly when there is a crisis at home or anywhere else in the world. Even though Mexico is stronger economically than certain other countries in Central America or South America now, the reality is, in a financial crisis, money retracts very quickly and foreign banks in particular, retract capital back home. That means, they would be less likely to provide credit (or lend) to small or mid-size businesses or individuals in Mexico. That’s a risk that Mexico has that is not well understood or discussed by the Minister of Finance or the Governor of the Central Bank, but it exists.
GB: Are there more important financial risks?
NP: Because of the high concentration of foreign banks acting as primary lenders and channels for external investment, the risk from oil prices exists on two fronts. First, any lending or external capital markets funding for energy sector is drying up, or has dried up. With oil prices so low, projections for profits in energy companies is low to negative. Foreign investors thus won’t put new money into energy companies. Default risk is rising too.
For Mexican energy companies, the only alternative to the capital markets is the banks themselves. Banks must decide whether to keep the companies to which they are already exposed afloat through direct credit lines or more expensive lending terms so they don’t lose more money on the loans or bonds they already extended. Banks must figure out whether they continue to lend into a declining energy environment or retract credit. If they retract, what happens to a company like Pemex, and the new CEO of Pemex is already saying this, is that jobs get cut; pensions get cut – which in Mexico, means more demonstrations and pain for families associated with the industry. Plus, a decline in profits means less revenues to the government.
GB: Is there something Mexican authorities and the average Mexican can do to protect themselves from this big risk?  
NP: What authorities in Mexico can do is be more vigilant about co-depend risks like the one I just mentioned. What average Mexicans can do is similar to what Americans can do, because regular people and small businesses in both countries are more exposed to what happens in the financial markets than they think about on a day-to-day basis. If imports cost more for Mexicans and the Peso is worth less, they’re losing more money if they decide to purchase imports. So, they should consider spending their money on products created here – in self-protectionist mode and as a safety mechanism during the period of currency and market volatility. Citizens and small firms should consider doing more business with smaller or mid-sized Mexican banks to help those that have more local ties – because they will give back more locally. That’s also something that I say in The United States regarding credit unions and local or regional banks or public banks.
In The United States, the Big Six banks are financially unstable. If you look at how far the banking sector has dropped in recent months, it is similar to the drop we saw right before the really big drop at the end of 2008. The momentum is downward. In Mexico as it is in The United States, smaller banks tend to be less involved in riskier transactions and more attuned to local needs, and that keeps them safer. Usually they also give better interest rates and charge lower fees. Separately, businesses in Mexico should try to help each other, which in turn solidifies the foundational economy, not the speculative, foreign capital flow controlled economy.
GB: The Governor of the Bank of Mexico says that ‘Emerging Markets should think about unconventional policies by central banks’, do you agree? What unconventional policies could Mexico implement?
NP: No. Then you would have an entire world gone mad – whereas now mostly the more core markets with financial systems almost entirely supported by their central banks, which is bad enough. In The United States; the Federal Reserve supports the financial system. That’s why when it raised rates by just 25 basis points, the major bank players got jittery and underperformed the market. The Bank of Japan is supporting its financial system, and has now introduced negative rates. But since zero percent rates didn’t work – neither will negative ones. Also, the core central banks have been stimulating money flows from an artificial perspective for seven years. The European Central Bank introduced negative interest rates, as well as buying all sorts of assets effectively from the same big banks that have been and continue to be in trouble. And ECB head, Mario Draghi indicated he’s going to double up and keep doing more of the same. China has been reducing rates, a little bit more slowly – but still, and they have been cutting reserves requirements for their banks, their method of Quantitative Easing, supposedly, so banks can use that money for core economic purposes in the country, which isn’t happening either.
None of these mechanisms that large central banks have created are solidifying the foundation of local economies or the global economy. It’s been pouring into assets like stocks and bonds. So, if the emerging markets, such as in Latin America, decide to do the same thing, they’re just going to have the same problems, which is that their central banks would become more powerful and effectively be supporting the biggest players in the financial system with cheap money and purchasing assets. In the case of Mexico, this would mean supporting mostly foreign banks. That money wouldn’t be going into the country, it’d be going into financial securities. A better thing to do, would be for central banks – if they wanted to be creative – to deploy some of those reserves to actually pay for infrastructure projects; create jobs and support the currency from the strength of the foundation of a country, rather than its markets.
If emerging markets copied core central banks’ QE actions, they would be playing a game that has no winner, but as its weakest players, they would be putting themselves at more risk.
GB: In your opinion, are The US considering negative interest rates and what would be the consequences for Mexico?
NP: Mexico still has three percentage points to play with before it has to worry about going negative, so there is a little bit of a cushion there. But, when rates were higher, they attracted more stable, rather than “hot” money into banks and bonds that financed growth oriented projects here. In addition, real people could deposit their money, and make money from savings accounts in a partnership with their banking system, where they benefitted as well. With zero rates, or negative interest rates, they get zero or they pay to have banks use their money. That said, it doesn’t make a difference, at this point, if The United States goes to negative interest rates, because the entire system is supported by Federal Reserve policy anyway. Whether it’s zero or plus twenty-five basis points or minus twenty-five basis points, it doesn’t make a tremendous difference – it prolongs a policy that doesn’t work for real people and economies.
So, can US rates go to negative? Yes, it’s likely that they wouldn’t. Other central banks are doing that deed for the Fed and the global big bank system. There’s much more of a coordinated global central bank policy today than there was, say, ten years ago, before the financial crisis. That’s why even when The Federal Reserve raised rates a bit, Europe went more negative and the Bank of Japan went negative. It’s all been coordinated to keep markets up and banks liquid because of the international flow and co-dependent nature of the global banking systems.
GB: Is there a solution to this economic disaster the central banks have created?
NP: For people in the next few years; being in cash; hedging yourself, staying out of the markets as much as possible – or if you have a risk appetite, occasionally short some swing sectors – like the banking or energy sectors. Banks remain vulnerable to fluctuations in perceptions about cheap money policy and mounting defaults in lower quality loans and bonds. And now, there’s nothing else that The Federal Reserve can do to really fix the problem that they have effectively created and extended, except occasionally say things that con the markets.
Ordinary people should try to stay out of this fray but look at their own personal portfolios and situations, spend money within communities, at local businesses, the small banks, the mid-size companies and re-establish this foundation up approach to individual economics, to build ground stability, because what’s coming from the top down is instability. The only way to fight instability from the top is to build and sustain economies from the bottom up. That’s probably a key military strategy too. Secure your troops, then fight. That’s what needs to happen, in terms of finance.
GB: Do you think that gold should, or could have an important role in fixing this financial mess and is it important from an individual’s perspective?
NP: Gold, even though it declined relative to the Dollar last year, has really held its value relative to most other currencies. Gold has proven itself to be a volatility deterrent play in this latest stage of the ongoing financial crisis – to have resiliency even though it came down from its highs during the start of the crisis. That can continue because as there is more awareness that these central banks policies haven’t, and won’t help fix anything, there’s more of a need for an alternative.
That said, we’re won’t get the full gold standard back because the Fed doesn’t want to relinquish its control over the dollar as the world’s main reserve currency. Nor does the powerful US banking contingent or government. Even if some entities like the IMF and People’s Bank of China are getting more gold, and that will have some effect on a new currency in the very distant future, it is more practical to examine what is happening today, which is a slower move to gold acceptance as one element of having some amount of gold backing currencies again because that would at least provide a physical floor to the manufacturing of fiat money
Because there’s so much volatility and the Dollar has remained stronger than it should be given The United States and Fed policies, given that other countries are simply weaker, gold in Dollar terms still has risk to it – but gold in other currencies doesn’t.
Allocating a portion of your non-liquid investment portfolio to physical gold as opposed to ETFs is the best way to be invest in gold. It’s a longer term play though – more volatility in these markets reflects a broadening understanding that central bank policies will never work – but the fact this has taken so long should give one pause. This is why I don’t recommend loading up on gold all at once right now, but doing so in gradual increments and on a physical allocated basis to avoid the type of ETF gold manipulation inherent to paper products. View gold as a way of storing physical wealth over the longer term; part of that portfolio you’re not going to touch, but slowly allocate.
GB: Finally Nomi, could you give us some details about your next book?
Yes, I’m currently on a frenetic world traveling schedule working on my next book called, Artisans of Money: The Rise of Central Bank Power, Artificial Markets and Financial Warfare. It probes this disturbing, new phenomenon – the pronounced shift in the methods of Central Bank creation of money and related role in formulating global policy. It examines the lasting economic repercussions of synthetic financial systems on people worldwide. I’m in Mexico now, Brazil next month, Japan the next, etc.…..It is my goal to expose the upstairs / downstairs nature of the world under monetary policy gone mad, so I’m gathering experiences from citizens and small business owners around the world, in contrast to the statements, actions, policies and most importantly, relationships and motivations amongst the leaders of elite central banks, governments, and mega private banks.

“(GB) Thanks Nomi, hope to see you soon again in Mexico.”