When discussing the use of foreign aid going to México, invariably the notion remains that México is a large recipient of U.S aid and has been so for many years. Much of this notion derives from the financial meltdown in the 1980s that led to the U.S bailout of México’s finances. So, I thought I would spend some time clearing up the air about this. It also neatly ties together the reason of why attacking NAFTA and México is a bad thing to continue to do.

Because of oil, México embarked upon heavy industrialization in the 1970s. To fund the country’s industrialization, the Mexican government depended heavily on borrowing money. The money was largely borrowed from international creditors (commercial banks) and not from the United States government. México, like other oil rich countries, borrowed against future oil production. When oil prices collapsed, so did the Mexican economy.

In the 1970’s oil had increased in value because of the oil embargoes by the oil cartel, OPEC and commercial banks saw an opportunity to make money by loaning to countries based on their future oil production. Like México many other Latin American nations participated in the borrowing money scheme.

On August 12, 1982, México announced to the world that it would not be able to make the $80 billion payment due on August 16. This started the so-called LDC debt crisis. Basically, México and other Latin American countries were unable to make the promised payments when they were due to commercial banks. By October 1983, 27 countries were having difficulty meeting their debt payments. Between them, they owed about $239 billion. Argentina, Brazil, México and Venezuela owed commercial banks about $176 billion. Of that, about $37 billion, was owed to eight of the largest U.S banks. The banks were facing the prospect of loan defaults leading to the failure of the banks.

These are not payments due to the United States or any other countries. This was speculative debt that banks embarked upon to make money off interest rates based on oil production.

Like the 2007 subprime banking crisis, the United State government stepped in to rescue the banking institutions from themselves and thus the Brady Bond was born.

There is one important point to keep in mind about the Brady Bonds. The bonds were not guaranteed by the United States government, i.e. the U.S taxpayer. Each country, like México, guaranteed the bonds on their own. When a country issued a Brady Bond, it collateralized it with a U.S. Treasury zero-coupon bond. This scheme assured investors that upon maturity, the principal would be paid for through the U.S Treasury zero-coupon bond.

To ensure the banks’ viability, the Brady Bonds were created in March 1989 as a mechanism to allow countries, like México, to restructure their debt with the commercial banks in order to avoid default.

In March 1988, México issued the Aztec Bonds, a pre-Brady bond, to restructure its debt to the international banking community. The 20-year Aztec Bond and the principal was guaranteed with a U.S treasury bond purchased by México. In return, the commercial banks forgave 30% of the Mexican debt.

A year later, in March 1989, Secretary of the Treasury Nicholas Brady, incorporated the Mexican debt model into a U.S. initiative to deal with the nonperforming debt that was threatening U.S banks. The Brady Bonds made it a policy of the United States, The World Bank and the International Monetary Fund to cooperate with commercial banks to allow then to restructure their foreign debt portfolios.

By July 1999, 17 countries, including México, had incorporated about $130 billion in Brady Bonds to pay off their international debts.

In 2003, México became the first country to retire its Brady debt.

The three important things to note about the Brady Bonds is that 1) it was México’s debt restructuring model that led to the creation of the Brady Bonds, 2) México paid back the bonds, and 3) México did not use U.S. taxpayer monies to pay back its debt.

However, the most important result of the 1980’s financial crisis for México was how it forced the country to move away from a debt laden oil economy towards an open markets economy that has transformed México into the eleventh largest economy today. Had México continued to rely on oil as its primary economic engine it would be in a worse economic situation then Venezuela finds itself in today.

The North American Free Trade Agreement (NAFTA) has transformed México economically, and in the process has risen the Mexican standard of life, but most importantly for the United States, it has allowed México to be a strong partner in helping secure the United States’ southern border from would-be aggressors.