Money: A Peso for Your Thoughts


Are you worried about where to put your money now that the U.S. is acting like a banana republic? Would you be interested in a nearby, stable, conservative country with a hard currency, where you can get 11½ percent interest on accounts which are for all practical purposes guaranteed by the government? And, while we're at it, a country which also protects the confidential nature of bank records and has no treaty arrangements with the U.S. for cooperation on tax matters? Would you believe, Mexico?

As we have noted before in this column (e.g., "Free Money," REASON, February 1973), the combination of inflation and taxation pretty well wipes out any return on most fixed interest investments.

Bleak as this may be, there are investors who, for one reason or another, have to go into fixed interest investments. For those investors fortunate enough to have blocks of $100,000 to move around, there are a number of opportunities to earn a decent return, opportunities which are generally denied the small ($1000—$5000) "retail" saver. Part of this results from the economies of scale in handling deposits, but the determining factor is the government policy which restricts interest payable to small savers so as to channel these funds into savings and loan associations to help provide below-market interest mortgages to keep the home building industry going.

Unlike the U.S., Mexico does not have a prosperous middle class to burgle, so they have to attract foreign money at market rates in order to finance their industry and agriculture. The vehicle for this financing is the "financiera," an institution which purchases funds from investors and re-loans them out to business firms or large farming operations. Financieras have two types of deposits: "Pagares," which are term certificates, and "Bonos," which are demand deposits.

Pagares currently pay 11½ percent gross on one-year certificates, with shorter term paper paying less. Bonos pay nine percent. These rates are current as this article is written but may change with market conditions, although historically these rates have been pretty stable. These are gross yields, before Mexican withholding tax, which currently runs 21 percent.

This Mexican tax may, however, be taken as a credit against U.S. taxes (use IRS form 1116, Foreign Tax Credit), so that for most investors the yield could be taken as a net figure when comparing it with other taxable interest-bearing investments.

There's probably no need to be worried that the Frito Bandito will expropriate your bank account. Bank deposits don't involve the touchy matter of ownership of "national resources" as do, for example, mines or oil wells. Neither are they as "visible" as a factory which can excite local envy. Most important, perhaps, is the fact that Mexico depends on a constant turnover of these funds to oil the wheels of its industry and commerce and there is nothing like a whiff of nationalization to scare off capital. While a mine or a factory is a vulnerable fixed asset, capital can disappear with the click of a teletype.

While financiera deposits are not formally insured, the government has, in effect, stood behind financieras to bail out any that got in trouble in order to preserve the country's good name as a safe haven for money. It is reported by a number of people who seem to know the situation, that no depositor has lost money through the failure of a Mexican bank or financiera in over 40 years. While this policy on the part of the Mexican government is not a matter of law, we should remember that a law is no protection against most governments anyway. Most investors would probably be better off to rely on the market forces to keep the government honest, in this instance on its need to keep up the flow of foreign money into its financial institutions.

Deposits are denominated in pesos and customarily start at amounts of 10,000 pesos ($800), 50,000 pesos ($4,000), and 100,000 pesos ($8000) and run up to 1,000,000 pesos ($80,000) at which point even higher rates become available. As far as risk of devaluation goes, the peso is classed by the IMF as a hard currency and may even be sounder than the U.S. dollar. The relationship between the peso and the dollar has not changed for 20 years. This means, of course, that the peso followed the dollar down on its recent devaluations but due to the volume of trade between the two countries, an upvaluation against the dollar has generally been thought out of the question. As a consequence, the peso probably presents no risk against the dollar on a peso devaluation, but probably also presents little opportunity for profit on a dollar devaluation.


What is the tax situation? Interest is taxable to U.S. residents at ordinary income rates. Income is also subject to Mexican withholding tax at the source at a rate of 21 percent. Since, as we have noted, this may be taken as a credit (not simply as a deduction against income) against American taxes, the rate may be treated as an after-tax figure when comparing it to the earnings of U.S. bonds or accounts. Mexican deposits are free from the U.S. Interest Equalization Tax through the underdeveloped nation exemption. Financiera deposits are foreign bank deposits for the purpose of reports under the U.S. Bank Secrecy Act, including the reports on the transmittal of funds outside the U.S. The Bank Secrecy Act does not restrict foreign accounts, it merely requires that you tell the government what you're up to. (See "Bank Secrecy," REASON, December 1973.)

While we're on the subject of candor with one's sovereign, we might note this quote by Eugene Latham, of Mexletter Investment Counsel:

Mexican law is similar to Swiss law as concerns the guaranteed secrecy of bank accounts. While Mexican accounts are not normally operated as "numbered" accounts, it is against the law for any bank, broker or counselor to reveal any information about a client or depositor to a third party. Since the Mexican government has no tax treaty arrangements with any other country, the confidential nature of all Mexican investments is assured.

For the investor who wants to try his hand at a Pagare or a Bono there are a number of options open. He may deal direct with a financiera. There are some considerations against doing this. Besides the language problem, Mexican laws are in some respects rather technical and may pose a snare for the unwary (or even for the cautious, for that matter).

To get around these problems, an American intermediary may be used. This will reduce your return slightly, but the convenience and expertise should be worth the cost. One of the oldest of these is Mexletter, mentioned above, with offices at Hamburgo 159, Mexico 6, D.F. Even closer to home, Shearson Hammill handles pagares for their customers. William Meikle of Shearson says that he has been handling financiera certificates since 1968 and 80 percent of his customers have renewed them.

For further information readers may write to Eugene Latham at Mexletter or Carl Ross at Inversiones Alba, Reforma 336, Mexico 6, D.F. In this country they can contact William Meikle at Shearson's Los Angeles office. There is, in addition, a booklet on the subject available for $2 from The Investor's Mexico, P.O. Box 2816, Grand Central Station, New York, NY 10017.

Davis Keeler's Money column alternates monthly in REASON with John J. Pierce's Science Fiction column. Copyright 1974 DAVIS E. KEELER.