The international banking crisis that began in 2007 has brought the relationship between international banking activities and financial crises to the forefront. The growing reliance on foreign interbank funding by domestic banks has been recognized as a crucial factor in explaining the banking and sovereign debt crisis currently affecting several peripheral European countries. This paper shows that the link between financial crisis and international interbank lending is not a new phenomenon; a similar trend can be observed in the Mexican banking sector during the run-up to its 1982 debt crisis. I explore the international activities of Mexican commercial banks in the years preceding the country´s default and demonstrate that they became involved in international lending which was funded largely through heavy short-term interbank foreign borrowing. I provide new archival evidence which shows that in intermediating foreign finance with local public and private borrowers, Mexican banks incurred maturity, interest rate and currency mismatches and dangerously increased their risk position. This paper provides insights for understanding the Mexican debt crisis as closely intertwined with problems in the domestic banking sector, which were, in turn, linked to its involvement in the international financial system.

This article explores the international expansion of Mexican banks and its implications for the domestic banking system during the decade leading up to the 1982 debt crisis. In contrast to the prevalent focus in the literature on profitability and performance, I examine the asset and liability structure of the banking sector and show that there were clear signs of deterioration in its financial condition well before the onset of the crisis. Financial statement analysis reveals that the banks engaged in international lending and foreign funding were the ones with the greatest propensity to be adversely affected by this problem. The international expansion of Mexican banks emerged and developed as an exit option to domestic funding problems and increasing competition from foreign bank loans, in a context of growing needs for financing and foreign exchange in Mexico.

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The recent European debt crisis has renewed interest as to why debtor countries honour their foreign debts and subscribe to respectively burdensome rescheduling conditions. While the cost of defaulting in a domestic financial system has been recognised as a main motive for repayment, the factors that cause sovereign states to refrain from debt repudiation are not fully understood. This article investigates the reasons behind the repayment decision and weak negotiating position of the Mexican government following the 1982 debt crisis. It shows that leading commercial banks had considerable amounts of external loans in their books, and that Mexican policymakers lacked the foreign exchange access they needed to secure the stability of the domestic banking system. The high exposure of domestic banks to Mexican debt and their heightened dependence on foreign capital worked as mechanisms that allowed international creditors to enforce their claims and deterred Mexico from declaring a unilateral default.

When did modern financial globalization really take off? This question is today part of a great debate among economists and social scientists. But it is also a historical issue which needs to be grounded in detailed studies which bridge national with international trends as well as changes in the functioning of the world economy. The new study by Sebastian Alvarez on Mexican banks and foreign finance during the 1970s and in the subsequent debt crisis of 1982 provides an original and innovative perspective on the birth of modern globalization from the standpoint of developing nations, which then found themselves at the crossroads of a powerful process of expansion of capital flows that have transformed fundamental aspects of the economies of practically all countries.In many regards, financial globalization began to take off in 1974, when the last controls over capital movements in the USA were lifted, at a time when the majority of the European governments and Japan had already abandoned the regime of fixed exchange rates and their exchange rates were floating. It is clear that the flexibilization of the exchange rates threatened all economies, but also reinforced what were already considerable capital flows on a global scale, which came initially as a result of the expansion of Eurodollar markets. A great number of multinational companies and international banks (which accompanied them in their worldwide expansion) benefited enormously from this opening.But simultaneously another financial transformation had its origins at this time as a result of the accumulation of enormous surpluses in the oil-exporting countries that led to the recycling of billions ofviii FOrEWOrd 12