U.S. Bankers Urged to Help Ease Mexico Debt

Arizona Gov. Bruce Babbitt warned Monday that Mexico faces political and social upheaval if major U.S. banks do not take steps soon to help the financially beleaguered country cut in half the $10-billion-a-year interest payment on its foreign debt.

The interest payment alone has paralyzed Mexico’s economy and reduced the standard of living 40%, Babbitt told about 500 bankers at the annual California Bankers Assn. meeting here.

“This is not just a banking issue,” he said. “It’s not just a foreign aid issue. It’s a national security issue that links our futures together inseparably forever on this continent.”

In an interview later, the Democratic governor said a worsening economic crisis in Mexico could result in that country defaulting on its $99-billion debt--$26 billion of which is owed to major U.S. banks--and “a radicalization of the politics” to the point where Mexico could become another Cuba.

On other issues, Babbitt urged the bankers to support a bill in the California Legislature that would allow interstate banking, which some smaller, independent banks are beginning to oppose. He also urged them to support the tax reform bill passed by the Senate Finance Committee, saying he believes that it “will work an enormous revolution for the good of the American economy.”

Babbitt’s comments on the Mexican debt come at a time when relations between Mexico and its international lenders are worsening. 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 banks, 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 talks about new loans or renegotiating any of the old ones.

Babbitt, who recently toured parts of Mexico with Arizona bankers and talked with Mexican President Miguel de la Madrid about the debt, said “austerity and depression” will continue there, partly because the nation’s budget for next year was based on anticipated oil prices of $23 a barrel. But prices have fallen to $15 a barrel, and Mexico has little else to export.

He said the $10-billion interest payment amounts to 66% of Mexico’s total export revenue, 75% of its total trade surplus and 7% of its gross national product.

In urging the banks to cut the debt service in half, Babbitt said they could either defer the interest or “capitalize” part of the remaining interest payments, adding them to the principal amount. Federal regulatory agencies must change any regulations that would impede such efforts, he added.

He said Mexico also has to realize that it must move from a closed, import economy to an enterprise economy that is competitive and export-oriented.

On interstate banking, Babbitt said the effect of his state’s new law allowing out-of-state banks to purchase Arizona banks was predictable: “California bought all our banks,” he joked.

Actually, two California banking companies, Security Pacific and Union, and two New York companies, Citicorp and Chase Manhattan, bought, respectively, the third-, fourth-, fifth- and sixth-largest banks in Arizona.

The largest banks and the smaller independent banks are unaffected so far, he said. The purchases will not be formally approved until October, and no shift in market shares has been noticed yet, he said.

“Arizona has become a battleground for interstate banking, and that’s good,” he said in the interview. “It’s exactly what we anticipated, and we think it will benefit the consumers” through competitive loan and interest rates.

Meanwhile, L. William Seidman, chairman of the Federal Deposit Insurance Corp., in a speech at the meeting, said his office is taking steps to encourage insurers to provide coverage for bank directors and officers. Among those steps, he said, is a significant reduction in the number of new suits that his agency is filing against the managers of banks that fail.

Seidman, whose speech was widely applauded, said his agency is trying to improve the ability of directors and officers to get insurance.