How To Protect Yourself From Banking Busts Overseas

“Kathleen, I’ve been looking at Mexico, Panama, and Costa Rica. I loved Mexico—it appears to be a booming First World nation—but I read recently their central bank is a bust. I think Panama and Costa Rica are in better shape. I’m just wondering what impact Mexico’s central banking problems could have on foreign residents… We would probably keep very low amounts in personal bank accounts, but what protections should we put into place?”

Phyllis, United States

Latin America Correspondent Lee Harrison responds:

A quick look at the numbers shows that Mexico’s debt is currently 41.9% of their GDP and trending lower (better). The U.S. debt is currently 107.5% of the GDP and trending higher, according to the IMF. Mexico’s budget shortfall is currently about 10%, while the United States has a deficit of around 19%.

So if I were a Mexican, I’d probably be (justifiably) worried about my U.S. holdings. But I think the real answer is to not have all of your money in either country. If a central bank goes over the cliff, your savior will be diversity.

In any case, I think you’ll have more risk of currency fluctuations than central bank failures abroad. If the Mexican peso strengthens against the dollar, your cost of living will go up in Mexico. If the dollar strengthens, it will go down. And both have happened over the years.

During a five-year period in Uruguay, I saw the Uruguayan peso gain 83% on the dollar, which raised my cost of living, in dollar terms, by the same amount. Since then, the dollar has gained some of that back, which lowers my cost of living in dollar terms. Again, the answer is diversity. For living in Mexico, I’d keep some of each currency in reserve, and exchange one currency for the other when it looks to be to your advantage.

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