Hot money and the politics of debt. - book reviews

Washington Monthly, Oct, 1987 by R.T. Naylor

Hot Money and the Politics of Debt.

The most perplexing--and frightening--aspect of the foreign debt crisis is neither the size of the Third World's IOUs nor the banks' mystifying rationale for having shipped all that money out in the first place. Nor is it even the bizarre geopolitics of the Western governments that allowed them to do it. It is rather the little-understood --and, until recently, poorly documented --phenomenon of "flight capital,' the idiom for the electronic sleight-of-hand by which some $200 billion of the $450 billion borrowed from 1975 to 1985 by the 18 largest debtor countries landed in foreign accounts of Third World nationals, unchecked, unregulated, and irretrievable. The more we learn about flight capital, the more it is apparent that what bankrupted most of these countries was their own citizenry absconding with foreign exchange reserves, often abetted by the same creditor banks that later screamed when forced to reschedule debt. For all these reasons, R.T. Naylor could not have chosen a more apt subject for his new book.*

* Hot Money and the Politics of Debt. R.T. Naylor. Simon & Schuster, $18.95.

What Naylor's numbers reveal is theft on a scale unprecedented in history; Nazi Germany's looting of Europe is insignificant by comparison. In Latin America, for example, some $100 billion fled to offshore havens between 1979 and 1983. By 1984 Venezuela alone had external assets of $35 billion--more than its total foreign debt. In Mexico, the scale of corruption and capital exodus is stupefying. Union bosses are alleged to have stolen some $1.5 billion, apparently following the example of government industries, which drained an estimated $15 billion from the national treasury during Lopez Portillo years--roughly equal to what the Shah's entourage pulled out of the Iranian National Oil Company in the 1970s. It gets worse. President Lopez Portillo's advisers estimated that during the three years prior to August 1982, a minimum of $45 billion was drained from the country's dollar reserve-- showing up in the form of $31 billion in U.S. real estate and $14 billion in U.S. bank accounts. Mexico City's $65-a-week police chief--to take just one celebrated example--was found to have funneled enough money out of the country to buy a $2.5 million mansion in the United States.

Where did all the money go? How did it get there? To understand, you must first know how foreign loans move to a country from a multinational bank, and how they then sneak out the back door. The entire transaction takes place in New York City, since virtually no dollars ever leave this country, and all dollar accounts are held ultimately in New York. "Flight capital' means nothing more than electronic flight from one account to another at one of New York's big banks. Blip, blip, that's all.

Let's say that Mexico, which needs dollars to pay for its imports--no one in his right mind would take a peso in exchange for anything outside of Mexico--borrows $100 million from Citibank. When Citibank makes the loan, it "disburses' funds by taking $100 million out of its own account and crediting Mexico's account with Citibank for that amount. Now the sovereign government of Mexico has full use of those dollars. It can, in effect, write checks against the Citibank account to pay for tractors from Peoria or electronic equipment from Japan.

Because dollars are so precious to Mexico, and because the government has to pay them back, it must carefully husband its accounts at Citibank so that the checks written pay only for useful products or raw materials. Any Mexican who wants to trade pesos for dollars has to have a good reason. That's the theory, anyway.

Now, enter the Mexican police chief. Because he knows somebody at the finance ministry, or because he has paid a bribe, he can take his illgotten pesos to the central bank and exchange them for dollars. Once approved, it is a simple transaction. The government instructs Citibank to debit its $100 million account for, say, $2.5 million, and transfer the money to another account at Citibank, this time in the name of a Swiss bank. Blip, blip, and the money's in that Swiss account, under the name of the chief. Although the dollars stay right there, the Swiss bank simply "books' them to its Zurich branch, which means that the Mexican police chief's name is no longer visible to the New York authorities (all they can see is the account of a Swiss bank). When the police chief is ready to buy his house in Connecticut, he instructs the Swiss bank to pay the $2.5 million into the seller's account, probably with another big New York bank (or, again, at Citibank).

That is substantially the way all electronic flight capital works, whether the "offshore' bank is Swiss, Panamanian, or Singaporean, whether the money is legitimately earned or stolen. The net effect: the government of Mexico still owes Citibank the dollars, for which it must sweat blood and export enough oil to pay it off: but the dollars are now invisible, safe from regulatory authorities in Switzerland, in private hands, owed to no one, locked up in a house in the American suburbs. In one form or another, that's how $45 billion got blipped out of Mexico, never to be seen again.