Mexico Feuding With Lenders as Cash Needs Rise : Balks at Demands by IMF, Bankers to Cut Outlays as Condition for New Loans

Relations between Mexico and its international lenders are worsening at a time when Mexico badly needs new money to handle its $99-billion foreign debt.

Talks between Mexico and the International Monetary Fund are at an impasse over the country’s inability or unwillingness to cut government spending, a key condition for new IMF funds. And commercial bankers, who hold nearly 75% of Mexico’s debt, are playing hardball, demanding that Mexico accept a stringent IMF economic program before they will even resume talking to the debt-ridden nation.

The world watches with growing concern because a Mexican default or repayment moratorium would threaten the health of hundreds of major banks in the United States, Europe and Japan. Even if Mexico and the IMF reach an accord soon, bankers say, the country’s negotiations with bank creditors are expected to be bitter and protracted.

“It’s going to be a long, hot summer,” predicted Samuel H. Armacost, president and chief executive of Bank of America, which holds $2.7 billion in loans to Mexico.

Follow-the-Leader Syndrome

Mexico also is seen as a trend-setter among developing nations, which together owe banks and international agencies worldwide nearly $1 trillion. Bankers worry that a Mexican refusal to make debt payments could inspire scores of other nations with debt problems to join together and declare a debt “holiday.”

Mexico owes commercial banks around the world about $73 billion; $26 billion of that is owed to U.S. banks, most of it to the nation’s 10 largest banks. Another $26 billion is owed to governments and multilateral agencies such as the IMF and World Bank.

Bankers, economists and government officials in Mexico and the United States are publicly cautious and privately pessimistic about prospects for an accord leading to significant economic reforms in Mexico and a resumption of voluntary new lending by the banks.

“It’s hard to be optimistic about Mexico right now,” said Carl Weinberg, senior economist at Shearson Lehman Bros., a Wall Street investment house. “They need new money and it’s not clear where they’re going to get it. The situation starts off bad and just seems to get worse the longer they leave it (unresolved).”

Mexican President Miguel de la Madrid finds himself in both political and economic binds. To maintain domestic support, he has to project the image of a tough, nationalistic negotiator. A Mexican politician seen as knuckling under to the IMF and international bankers would be doomed.

But De la Madrid also knows that his nation’s economic situation is hopeless without new money from foreign lenders. Estimates of the new funds required this year range from $4 billion to nearly $10 billion.

The IMF demands that Mexico reduce its budget deficit, which is currently running at about 10% of gross domestic product, to the previously agreed target of 4.5%. That is viewed as a near-impossibility because of the plunge in the price of oil, which provides 70% of Mexico’s export earnings and 50% of government revenue.

Slash Government Spending

Attempts to slash government spending, which already has been cut deeply under previous IMF plans, run into economic and political roadblocks. About half of the budget is dedicated to servicing debt, both foreign and domestic, and therefore cannot be reduced.

Cuts in the other half means reducing the size of the bureaucracy or selling off state-owned industries, painful steps because either measure slices into support for De la Madrid’s Revolutionary Institutional Party (PRI), whose power is heavily dependent on government-sponsored trade and public-worker unions.

De la Madrid warned last month that “the difficulty in covering the debt service makes for a climate of uncertainty that discourages productive activities and might cause social instability. . . . If the present situation continues, there is no possible solution.”

He added that bankers were in large measure responsible for Mexico’s problems and would have to make financial sacrifices to solve them. Such statements are read as an implied threat to unilaterally limit interest payments to a percentage of export earnings, as Peru did last year.

Many bankers and diplomats discount much of the Mexican president’s rhetoric as playing to the domestic gallery. But some bankers believe that Mexico’s lack of progress with the IMF, falling oil prices and dwindling foreign exchange reserves may well add up to a replay of August, 1982, when Mexico announced that it could not repay its loans and touched off the current debt crisis.

“I don’t see a new money package being put together in the near term,” one East Coast banker said. “Without such a package, the country will run out of money in September or October. I think it’s going to go to the brink.”

European bankers are even more pessimistic. One Swiss banker said Mexico is essentially broke and its lenders should admit it and begin to write off substantial amounts of Mexican loans. U.S. bankers dismiss such a solution because they have much more money at risk than the Europeans, and they do not want to forgive Mexican debts because other indebted countries will demand the same treatment.

In Mexico City, rumors of a unilateral reduction in payments are considered part of Mexico’s negotiating strategy. “I suspect that the threats and rumors will continue up until something is signed (with the IMF),” a Western diplomat in the Mexican capital said.

But one of the problems in reaching such an agreement is the present unpredictability of the Mexican economy.

Most foreign and Mexican observers expect the drop in oil prices to severely strain Mexico’s hard-currency reserves, which it needs to repay debt. But that has not happened, at least not yet. Mexican officials estimate the country’s reserves at $6 billion, about the same as six months ago, before the big drop in oil prices.

Mexican government officials said many Mexican firms have been forced to repatriate funds that were sent abroad as flight capital in order to keep their businesses operating, thus shoring up reserves. But this is considered a temporary phenomenon.

(However, U.S. sources said they do not trust the Mexican reserve figures. Several bank officials and private economists estimated the reserves at from $2.5 billion to $3 billion, enough to make debt payments for about four months.)

The future of oil prices is also uncertain. Prices have been inching up, but there are reports that Mexico’s volume of exports is shrinking, thus negating any gain from rising prices.

Proposals Rejected

In recent months, Mexican debt negotiators have floated several proposals to ease the debt burden, among them tying interest rates to oil prices or to the rate of inflation.

Bankers have so far rejected all such proposals and instead are prodding Mexico to reduce government spending, encourage more exports and open its economy to foreign investment as a way of attracting funds and spurring growth in the private sector. They say they are not going to commit new funds unless they increase Mexico’s future creditworthiness. Everyone involved in Mexico’s debt problems agrees that these are the key issues to be discussed in any negotiations about new money for Mexico. What is not known is when those talks will begin in earnest and how close to the brink Mexico will be driven by its own leaders and its foreign bankers before an agreement is reached.

“It’s a tremendous game of chicken,” said George Salem, bank analyst for the New York investment firm of Donaldson, Lufkin & Jenrette.

John Broder reported from Los Angeles and Dan Williams from Mexico City.