As Canada takes its vociferous opposition to a global bank tax back to the world stage next week, it can count on NAFTA partner Mexico as a staunch ally.
Calling such a levy a moral hazard and a "punishment" for those countries with healthy financial systems, Mexican President Felipe Calderon said his country wants no part of such a measure, designed to create a global fund to pay for future bank bailouts.
"If the global economy builds a fund in order to bail out banks, you can be sure that there will be bailouts in the future," President Calderon said in an exclusive interview with The Globe and Mail's editorial board on Friday. His message puts him firmly in the camp occupied by Prime Minister Stephen Harper; both men argue that banks would be more likely to engage in reckless behaviour again, knowing government would always be there to rescue them.
The battle lines are now becoming clearer as a growing number of emerging countries in the G20, including Mexico and Russia, line up on Canada's side against the fund's main proponents in the European Union.
Most emerging countries managed to avoid the destructive banking practices that wreaked havoc on balance sheets in the United States and much of Europe and triggered massive government bailouts, takeovers and forced mergers to prevent insolvent institutions from collapsing.
Supporters of a new global levy argue that it is in all countries' interests to have an insurance policy in place to safeguard the stability of the world financial system and prevent another credit freeze of the type that triggered a worldwide economic slump in late 2008.
The U.S. government has been broadly supportive of a universal tax, arguing it is the only way to keep banks from avoiding such payments by shifting operations to jurisdictions with no such levy. But Washington has recently grown more lukewarm to the idea over pressure in Europe to expand the reforms to include curbs on hedge funds.
Emerging countries could play a key role within the Group of 20 in forging a compromise on a financial reform package, and they are being courted by both sides in the debate in advance of a meeting of finance ministers in South Korea next week. But most "regard it as an advanced economy issue and of no concern to them," because their financial institutions tend to be more local than international players, said Eswar Prasad, a professor of trade policy at Cornell University and a former official with the International Monetary Fund, a strong advocate of the global tax.
"We think that what is required is better regulation, instead of more taxes to burden the banking system," Mr. Calderon argued.
Like Canada's globally admired financial institutions, Mexican banks weathered the credit crisis fairly well, thanks to their strong capital positions and good regulation, he said. "The Mexican and Canadian experience is more or less the same. In this particular crisis, the banking system was an asset. It was part of the solution, not part of the problem. … Not one single cent of taxpayers went to any Mexican bank."
Why, he asked, should Mexico and other countries that enforced effective rules and maintained healthy banking systems pay for others' mistakes.
A Canadian counterproposal would require banks to sell debt that would convert to equity at times of extreme stress. But Mr. Calderon said tougher regulation, properly enforced, is the best answer.
The President acknowledged that Mexico has had its own banking disasters in the past, most notably during the so-called Tequila Crisis of late 1994 and 1995, when its currency crashed and the U.S. Treasury and international agencies came to its financial rescue. At the time, the Mexican government imposed a bank tax of its own.