Mexico’s Approach to Debt Fuels Hot Debate

Debate on Mexico’s huge foreign debt has intensified as the country enters another period of austerity in an effort to curb inflation.

A wave of resentment in Latin America over debt repayment has raised questions here about whether Mexico is being victimized by international bankers. The debt and the austerity measures, along with unemployment, inflation and reduced government welfare programs, are invariably linked in economic news reports.

A daring move by Peru to reduce its debt payments has created a sensation here, and prompted speculation as to whether Mexico might do the same thing.

The new president of Peru, Alan Garcia, said recently that his government will put a limit on debt payments equal to 10% of Peru’s export earnings. That would be about $300 million this year, compared to the more than $3 billion expected by Peru’s creditors.

And Cuba’s Fidel Castro has proposed that the countries of Latin America simply cancel their foreign debt. This notion has attracted much attention in the Mexican press and when a group of economists gathered not long ago at a Mexican resort there was a widespread rumor that Mexico might soon join the chorus calling for a moratorium on foreign debt payments.

Politically Sensitive

The debt question is politically sensitive in Mexico, as it is throughout Latin America, for many Latin economists and politicians consider the debt unpayable. They contend that economic recovery in the region is obstructed by the need to meet interest payments on the debt.

Mexico owes about $95 billion to foreign banks, although recent refinancing agreements have put off some payments for up to 14 years. Now Mexico’s largest labor organization has called for renegotiating the debt in a manner “that will not hold back development.”

The Labor Congress, which is made up of several labor union federations, issued its proposal after a number of left-wing parties and political commentators had called for similar action. In response, the government insisted that it is making an active effort to ease the debt burden but made it clear that it will not suspend payments on the debt.

Finance Minister Jesus Silva Herzog described as unrealistic the talk of a moratorium on debt payments. “It sounds very attractive,” he said, “but I believe this point of view isn’t very realistic.”

Bankers applaud Mexico’s record in servicing its debt, even though steadily declining prices for oil, Mexico’s most important dollar-earner, have impaired the country’s ability to pay.

Big Chunk of Earnings

Recent savings due to lower interest payments have helped offset the reduced oil revenues. Nonetheless, this year’s debt payments of some $13 million will eat up about 40% of the country’s earnings from abroad.

Meanwhile, the Mexican government has ordered a series of steps aimed at stemming a sudden rush of higher prices and a decline in the relative value of the peso. It is the second time since 1982 that the government of President Miguel de la Madrid has taken such steps.

About 28,000 government jobs are to be eliminated, though unemployment and underemployment are already estimated at nearly 50% of the labor force. This will not bring on any quick reduction in government spending, because the idled workers will have to be paid compensation.

Also, the peso will be permitted to fall further in relation to the dollar, making Mexican goods cheaper abroad and, it is hoped, increasing exports. At the same time, imported goods will become costlier.

Official spokesmen attributed the worsening inflation--30.1% through the first seven months of this year--and the peso’s slide at least in part to worries about the declining price of oil, but other factors are also involved. For one thing, in anticipation of recent elections, the government flooded the economy with pesos in an effort to increase economic growth. Spending in the first four months of the year accounted for about two-thirds of the expected budget deficit for all of 1985.

In turn, consumer buying reduced the volume of goods available for export.