Financial Development in Mexico between 1975 and 2009

Mexico's financial sector transformed significantly over the last three decades. The shift from cross-border towards domestic financing and, domestically, from bank to bond financing can be seen as the main contributor to this development. The main challenge of attracting international and domestic investors to hold peso denominated debt is to overcome the so called "original sin". It means that emerging countries are unable to borrow in their own currency because of different macroeconomic problems and policy dilemmas. However, Mexico substantially developed its domestic bond market and is now after Brazil the second largest domestic debt market in Latin America in absolute terms. Moreover, since the pension system has been implemented in 1997 it has experienced rapid growth. The financial market liberalization stimulated the derivatives markets in Mexico, especially the issuance of mortgage-backed securities (MBS), called Borhis, increased enormously. However, these derivatives were one reason for the worldwide financial crisis. Moreover, due to structural problems in the Mexican economy it seems that the trade of derivatives undertaken by Mexican corporations deepened the effects of the actual recession. Thus, this hypothesis has to be proven empirically when reliable data are available.