Nation Burdened by Vast Debt and Falling Oil Prices Is Dealt New Blow

The Mexican earthquake was a terrible physical blow for a country already burdened by economic woes: a vast debt to foreign bankers, falling prices for its oil exports and a struggle to cut government social spending.

Because Mexico owes so much money, an estimated $100 billion, it has been undergoing a drastic austerity program, resulting in a lower standard of living for the average citizen. Imports have been restricted and government spending curtailed to devote money to paying interest on the debt.

Now, the country must devote part of its scarce funds for reconstruction and rebuilding after the devastating quake that struck Thursday.

Indeed, the size of the task will not even be known “until the dust clears, literally,” Stephen D. Cohen, a consulting economist and professor at American University in Washington, said Friday. And, he noted, “The economy was shaky enough as it is.”

As an example, Mexico had failed to meet the economic improvement targets required by an agreement with the International Monetary Fund and has been unable to draw on a scheduled loan of $450 million. Approval by the IMF’s strict standard is vital because it gives a nation credence with commercial bankers throughout the world for continued lending.

In a carefully worded statement Friday, the IMF acknowledged that Mexico was no longer drawing funds, saying that countries cannot get money “for as long as they are out of compliance” with an IMF austerity agreement. Mexico has failed in its effort to bring down its inflation rate, which has been running at 55% annually.

Failure to get a stamp of approval from the IMF could create problems for Mexico’s efforts to persuade commercial banks to stretch out the repayment time for a massive $50 billion in loans due over the next five years. Mexico wants the banks to agree to delay payment on the loan principal until the mid-1990s.

Reaching a final agreement with the lenders “could well be held up while Mexico has troubles with the IMF,” said Cohen, who also is a consultant for Washington Analysis Corp.

Several hundred banks are participating in a very complex negotiation with Mexico to extend or “reschedule” the debt. But “any single bank can veto the thing by saying, ‘We won’t sign until the IMF is happy with Mexico,’ ” Cohen said.

U.S. banks have a total of $25.8 billion outstanding in loans to Mexico. The biggest lenders are Citicorp., with $2.9 billion, and Bank of America, with $2.7 billion.

While Mexico struggles to satisfy its bankers, the profit opportunities from its major export, oil, are dwindling. World petroleum prices are declining at a time when Mexico must have every additional dollar it can get to meet its debt obligations--and now, to rebuild sections of its ravaged capital city.

The earthquake will provide a “severe test of a resilient system,” said Guy F. Erb, head of GFE Ltd., a consulting firm specializing in Mexican affairs. “We don’t know the extent of long-term damage.”

He added, “It is just one more thing on top of a long catalogue of problems.” However, he noted, the Mexican people “have weathered severe earthquakes in the past.”

Mexico already was expected to ask bankers for $2 billion or $3 billion in new loans, even before the earthquake struck. After the disaster, it may take a major effort of both private and public spending to rebuild industries and homes, perhaps making it necessary to raise additional funds, Erb said.

On an immediate basis, the need to spend money for humanitarian purposes, to aid the injured and homeless, will put serious pressures on an already-strained budget, according to Erb. The Mexican government was trying to cut its spending. Instead, outlays now must be increased.

A more optimistic view was offered by U.S. Ambassador to Mexico John Gavin, who said the basic prospects are still encouraging for the Mexican economy.

“It’s not going to have that much of a negative impact,” he said in Mexico City. “Their industrial plant has not been damaged. When you consider that this is a country of 80 million people and Mexico City has nearly 18 million people, this earthquake will not seriously impact the economy.”