Halt in Loans to Mexico Reported : Failure to Adhere to IMF Economic Reform Pact Cited

The International Monetary Fund has suspended $450 million of crucial loans to Mexico because of the country’s failure to adhere to agreed-upon economic reforms, monetary sources said Thursday.

The development could put at risk Mexico’s agreement with its major creditor banks to stretch out loan repayments of $48.7 billion over the next 14 years.

Mexico was once hailed as the first and most successful example of the so-called Western strategy for dealing with the debt crisis, but the loan cutoff may have dealt a blow to IMF policies, underscoring recent pleas of Latin countries for a broader economic and political solution to the debt crisis.

The Western strategy for dealing with the debt crisis is expected to be a major topic of debate at next month’s IMF/World Bank annual meeting in Seoul, South Korea.

Under that strategy, the individual problems of debtor nations are dealt with separately on a case-by-case basis. But recently, Latin nations, weary of austerity, beset with mounting unemployment and in some cases facing social unrest, have called for the industrial world to shoulder more of the burden.

Expires in December

Latin America owes foreign creditors about $360 billion, roughly half of the total Third World foreign debt. The sources said that, under IMF rules, once a country’s economic performance falls behind the targets set for it by the global lending agency, the IMF cannot continue loan disbursements.

Mexico’s IMF program, under which roughly $900 million could still be paid out, runs out in December.

Bankers said that Mexican inflation, currently 56% annually, is running far ahead of IMF targets.

Bankers said the IMF move could complicate a recently signed agreement with commercial banks to stretch out almost half of its roughly $100 billion of foreign debt.

Mexican officials recently estimated that the country would need about $500 million of new money this year and between $2 billion and $3 billion in 1986.

But the bankers said that its deteriorating economy could mean that its needs are far higher, possibly as much as $7 billion.

They also said the country would almost certainly need a new agreement on economic reforms with the IMF.

Banks have balked at lending new money to heavily indebted countries that have not adopted IMF measures for restoring economic health.

New York-based Citibank is expected to send Mexico’s other creditor banks a message from Mexican Finance Minister Jesus Silva Herzog, explaining how the country plans to restore its economic health, the bankers said.

IMF loans to Latin America’s other big debtor nation, Brazil, which owes foreigners over $100 billion, were suspended in February. The two sides have been unable to forge a new agreement since then.

Latin presidents attending this month’s United Nations General Assembly are expected to highlight their dissatisfaction with the current western strategy towards the debt crisis.

State department officials, Mexican President Miguel de la Madrid and Brazilian President Jose Sarney are likely to hold bilateral talks with Secretary of State George Shultz while in New York at the United Nations.