Friday, March 20, 2009

A sale of Banamex, at prices mooted around $9-12bn, would have a significant impact on the currency.

TO BE NOTED: From Alphaville:

Citi, Banamex and the peso

Citi’s Banamex saga has taken a rather ludicrous turn:

MEXICO CITY, March 19 (Reuters) - Mexico said on Thursday that foreign governments can own stakes in its banks given the crisis in global financial markets, meaning Citigroup will not have to sell its Mexican subsidiary Banamex for now.

The finance ministry had been examining whether a U.S. government rescue plan to take a stake in Citigroup (C.N) would force a sale of Banamex, Mexico’s second-biggest bank and one of the crown jewels in Citi’s global banking empire.

“The law does not cover emergencies derived from the global crisis,” the ministry said in a statement, referring to legislation barring foreign governments from owning Mexican banks.

While the statement did not mention Banamex or Citi by name, it made clear that Mexico does not want to rile battered financial markets by forcing a Banamex sale.

If the legal logic behind this deal sounds rather strange, it’s because it is. There is something else going on here.

These two graphs, from Standard Chartered, should give you a hint of what that might be.

Standard Chartered - Mexico charts

The Mexican peso has weakened substantially since August 2008, meanwhile inflation in the country has stuck at quite a high level, creating something of a headache for the country’s central bank in terms of policy decisions; it can’t lower interest rates to boost its economy without further weakening the peso and increasing inflation.

A sale of Banamex, at prices mooted around $9-12bn, would have a significant impact on the currency.

RBS currency strategist Flavia Cattan-Naslausky explained to us last month:
… in 2001 Citibank paid USD12.5bn for Banamex. Banamex makes about USD900m in annual profits which is about 9x-10x book value. So that’s where this US9bn consensus number is coming from. But there are really several issues. First is who has that kind of cash?! And whoever does, do they want to put it all in Mexico these days?! So it would be more probable that there would need to be some financing scheme involved that lowers the cash portion of the payment. This would have strong implications for FX flows (or lack of) I think that it is a very big deal this whole sale as it will set a precedence for other foreign banks that need to divest in mexico because of nationalization of banks. It can get very complicated. That is why I think there is still a good amount of risk for the currency.

So being a bit flexible on legal rules on foreign ownership will save the Mexican government the hassle of sterilising currency outflows related to the deal and help preserve its fragile currency. A budding trade dispute with the US might might also have played a role in Mexican leniency, in this case.

But, make no mistake, this flexibility is meant to be very temporary. The Mexican government plans to send a bill to Congress to ‘clarify’ exemptions on foreign ownership restrictions in times of crisis. As Bloomberg reports, under that proposal:
… banks, after three years of operating under the exemption to allow foreign government stakes, would have to sell 25 percent of their Mexican unit’s shares on the local market. That requirement would rise to 50 percent of shares after six years.

So unless something changes in Citi’s ownership structure, Banamex is set to go — albeit eventually — whenever this ‘global crisis’ is over.

Related links:

Citigroup (C): Mexico moves the goalposts - Inca Kola
A Mexican US-fallout wave - FT Alphaville


Don the libertarian Democrat Mar 20 14:03
Unless I'm mistaken, it sounds as if this would also allow the US to seize Citi, and hence, Banamex, and hold it until it was sold, at least for three years.

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