One of the thorniest chapters of Mexico’s 1994-95 financial meltdown may be closing. In mid-July, four of the country’s biggest foreign-owned banks – Citigroup-controlled Banamex, HSBC of the UK, BBVA Bancomer, the local unit of Spain’s Banco Bilbao Vizcaya Argentaria, and Mexican-run Banorte – agreed to absorb nearly $830m in bad loans that the government took on in return for bonds in order to help save the banks following the peso crash.

The deal is an attempt to settle long-standing tensions surrounding the $100bn bailout. For years, regulators have argued that a chunk of the loans swallowed by the government in exchange for the bonds were questionable, involved insider deals and deserved auditing. The banks have resisted negotiating a pay-out and this has kept the matter in legal knots. However, in recent months, settling the bad debt issue has become urgent, as nearly $17bn of the government bonds will come due in 2005 and 2006. The original bond issue totalled $6bn, but has mushroomed to $20bn when counting interest. Concerns were rising that Congress would refuse to approve the payments, a move that could have sent shockwaves through the financial system.

The banks will also open once-secret documents from a 1998 audit that could unveil an additional $600m in dubious loans. According to local analysts, all told, the banks may be dealt a $1.5bn loss. US-based Citigroup says it will pay about $542m, the most of any institution.

The government appears pleased with the accord, but critics say the deal hardly accounts for all of the bank loans involved in the rescue package. Legislators who back the agreement, many coming from President Vicente Fox’s National Action Party, say bigger losses for banks would put the financial system in jeopardy.

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