IMF, Mexico Break Stalemate; Opens Way for New Loans : Government Agrees to Work Toward Cutting Budget Deficits

A stalemate in negotiations between Mexico and the International Monetary Fund has been broken, opening the way for cash-strapped Mexico to gain critical new loans from a variety of banks and international lenders, diplomats and bankers in Mexico City said Tuesday.

The loans are considered crucial to pulling Mexico’s crippled economy out of a deep recession as well as maintaining the country’s ability to continue payments on a massive foreign debt built up during the past decade. Bankers had indicated that they would not offer Mexico fresh loans unless the IMF approved reforms in the management of the Mexican economy.

Tuesday, a U.S. Treasury official testifying before a Senate subcommittee indicated that Mexico requires $6 billion in loans this year.

To Reduce Budget Deficit

Western diplomats and bankers reached by telephone in Mexico City said that Mexico and the IMF, after months of deadlocked negotiations, had overcome the main obstacle to an agreement: the size of Mexico’s budget deficit. In the compromise, Mexico has agreed to gradually reduce its budget deficit to about 6% of its gross national product from the current level of around 12%.

Previously, Mexico had resisted IMF mandated budget cuts fearing they would mean increased unemployment and unacceptable political risks. The IMF, on the other hand, had pressed for immediate slashes in the budget to assure that the new money does not go into unproductive projects.

“I guess someone had to give and, in this case, I guess both sides did,” a Western diplomat said.

Although the U.S. government is not technically involved in the negotiations with the IMF, sources in Mexico City said that Federal Reserve Chairman Paul A. Volcker approved the compromise during a visit to Mexico City on Monday. Volcker met with Mexican Finance Minster Jesus Silva Herzog.

Earlier this year, economists estimated that Mexico would need $4 billion in loans in 1986 to be used mainly to purchase goods from abroad necessary for production inside Mexico. However, sharp declines in the price of Mexico’s main export, petroleum, reduced government revenue substantially, increasing the lending requirement by $2 billion.

It is not clear how much the loans will stimulate the Mexican economy. Loss of oil revenue is estimated at from $5 to $7 billion this year. Even before this spring’s oil price declines, Mexico’s economy was not expected to grow this year.

The agreement with the IMF has not yet been signed. Mexican officials expected to meet with IMF representatives soon.

In any event, the breaking of the deadlock with the IMF defuses a building confrontation over the debt, pitting Mexico against the the IMF, the United States and commercial banks. U.S. banks hold a quarter of Mexico’s debt.

In recent weeks, Mexico’s president, Miguel de la Madrid, had come under increasing pressure to stop payments on the debt and divert the money to the country’s internal needs. Last week, Silva Herzog, for the first time, openly discussed the possibility of declaring a debt moratorium.

“We’ve got a few months breathing room,” said an American banker in Mexico City. “Then we’ll probably have to go through it all again.”

In Washington on Tuesday, Assistant Treasury Secretary David C. Mulford said that a package of loans totaling $6 billion could be forthcoming from the IMF, the World Bank, commercial banks, a consortium of government lending agencies grouped in the so-called Paris Club and from Japan through a special credit program.

Mulford praised the Mexican government’s recent economic management and Mexico’s devotion to paying the debt. “We have found the Mexicans demonstrating a constructive attitude. They have not allowed interest arrears; they have met their obligations,” he told the Senate Foreign Relations subcommittee on Latin American affairs.

He also said that Mexico has started to move toward a more open economy that presumably would bring in more foreign investment.

In Mexico City, meanwhile, President Miguel de la Madrid said in a televised interview that free-falling oil prices and uncertainty over how the nation could pay its foreign debt have brought on the violent fluctuation of the peso during the past week. “We don’t have a way to substitute” for the lost oil revenue, he acknowledged, but he said his administration is seeking alternatives.

De la Madrid chided his countrymen who “prefer their personal interest to that of the nation and have demanded dollars in excess.” But he maintained that the government will continue its hands-off policy and will not try to prop up the peso, which fell more than 20% relative to the U.S. dollar last week.