Why Rescuing the Mexican Economy Matters

January 29, 1995|By PETER WARD

There is a distinct sense of deja vu in the arguments that are emerging on Capitol Hill regarding congressional approval of the $40 billion loan guarantee package to Mexico following its recent peso devaluation and associated financial crisis. The same battle lines were drawn and arguments rehearsed only 18 months ago during the NAFTA debate.

Then, as now, the WIFA (What's In It For America) is: substantial net job gains; a decline in immigration from Mexico; hemispherical strengthening for trade and political relations; the strategic importance of Mexican political stability for the United States; and so on. The current crisis has given some of those who opposed NAFTA to call for U.S. withdrawal from the agreement, and others to say "We told you so." Once again, President Clinton has been obliged to focus his attention primarily upon the laggards in his own party, as Newt Gingrich so delightedly pointed out last weekend.

Like NAFTA, this rescue package is critically important both economically and politically for Mexico and for the United States. Comments such as those of Jesse Helms, who claimed that the Mexican government is corrupt and taking advantage of the United States, or of the banker who referred to the scheming of "Latin liars" are ill-informed and unhelpful. Indeed, international bankers, more than anyone else, were well-aware several months ago that financial crisis was waiting to happen.

It was inevitable for three reasons: First, Mexico's foreign reserves (the money available to pay back loans and investments as their due date came up) had declined severely during 1994, to an estimated low of $5.5 billion. Second, most analysts in the United States recognized that the peso had become substantially overvalued (by 15 percent to 20 percent). Third, Mexico was running a continuing trade deficit that was not being put to rights. Added to all this, investors were getting jittery because Mexico had become overly dependent for its foreign investment upon short-term bonds, offering attractive earnings but with short turnover (rollover) periods. This is a highly vulnerable strategy because once confidence in the economy ebbs, investors withdraw their deposits, and this places a direct drain on the level of foreign reserves.

Although the crisis was inevitable, Mexican governments handled it poorly. I say governments, plural, because President Carlos Salinas de Gortari should have taken the hit and devalued before handing over to President Ernesto Zedillo Ponce de Leon on Dec. 1. Unlike in transitions in the recent past, President Salinas kept a firm grip upon economic and political power, and refused to engage in any "slate cleaning" exercises, thereby denying his successor a clear run into the presidency.

Nor, when it came Dec. 15, was the actual devaluation and aftermath well-managed. Treasury Secretary Jaime Serra had denied that a devaluation was imminent, only to devalue the peso formally by 15 percent two days later. That enraged international investors who had expected the costly relationship they enjoyed with former Treasury officials to continue, and who had probably anticipated some form of "managed" adjustment in which their help would be sought. The lack of consultation meant that they pulled the plug, intensified the loss of confidence, and contributed to throwing Mexico into a financial tailspin.

The peso was allowed to float (and devalued by 40 percent); interest rates were raised; and early this month the Mexican stock market saw 12 percent shaved off the value of stocks in two days. Well before Christmas, Jaime Serra had been sacked, and the new finance chief, Guillermo Ortiz, had begun the process of financial shuttle diplomacy to New York and Washington, in which he sought to win back and reassure investors and to win support for the package. This is where we are now.

So, there is some justification for U.S. chagrin that it should be obliged to step in and support its new trading partner only a year after embarking upon the venture. But it is also important to understand what is being offered here. This is not a bail-out loan, but a massive government-led loan guarantee program designed reassure investors that: a) the United States is totally committed to free trade with Mexico and has confidence in that nation's future, and b) future investments will be underwritten with copper-bottomed guarantees (as though they were in dollars). In short, it replaces one kind of debt relationship with another that is more secure. It was modeled on a similar $10 billion package offered to Israel. It will not add to the U.S. debt.

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