$6-Billion Rescue Package Helps Mexico Ease Growing Economic, Political Tension

Officials in the United States and Mexico said Wednesday that an apparent agreement to provide Mexico with $6 billion in new funds to avoid default on its massive foreign debt will--for the moment--help defuse a gathering economic and political crisis in Mexico.

The immediate effect of the expected accord was to calm emotions building over the debt issue and to reduce the likelihood that Mexico might summarily refuse to make further payments on its $97-billion debt to foreign banks and international agencies.

It also helped to stabilize the Mexican peso, which had been losing value at an alarming pace, and to reassure investors on Wall Street, who had been unloading shares of U.S. banks with heavy Mexican exposure.

Plan Outlined by Treasury Official

The plan was outlined Tuesday in Senate subcommittee testimony by David C. Mulford, assistant Treasury secretary for international affairs. It calls on the International Monetary Fund and the World Bank each to contribute $1 billion in new money for Mexico; commercial banks worldwide to lend between $2.5 billion and $2.7 billion; the governments of the major industrial nations to add $600 million to $900 million, and Japan to contribute an undetermined sum in loans and trade credits.

The total of roughly $6 billion will not cover Mexico’s $7.5 billion in interest charges falling due this year, but it is timed to allow the country to keep current on payments for the next few months. About $1.5 billion in interest payments comes due before the end of July.

The essential terms of the program are not new, but their public statement by a key U.S. government official indicates that the long stalemate between Mexico and the IMF over Mexican economic policies may be nearing an end.

The involvement of Federal Reserve Board Chairman Paul A. Volcker, who met with Mexican finance officials in Mexico City on Monday, also indicates that relief for Mexico’s economic crisis has become a major political issue in Washington as well as in Mexico City. “Mexico has extremely difficult economic problems,” Volcker said following an appearance before a congressional subcommittee Wednesday. “It has lost a very considerable percentage of GNP (gross national product) and an even larger percentage of export value because of the oil (price decline).

“It is facing the need to accommodate to those circumstances. The question here is the ability to manage (economic) adjustment and deal with it in a political context.”

Asked about the impact on Mexico and its creditor banks if the effort fails, Volcker replied: “The impact on Mexico itself would be very severe,” as would be the blow to most major American, European and Japanese banks.

Mexican President Miguel de la Madrid has come under increasing pressure in Mexico either to reach favorable terms with the IMF and creditor banks or to repudiate the country’s crippling debt.

“The agreement is definitely needed,” said Gustavo del Castillo, a political scientist at the University of California, San Diego. “Mexico was ready to call a halt in payments.”

Peso Gains Strength

In Mexico City, the peso gained strength against the dollar, halting a recent uncontrolled decline. At one point last weekend, 800 pesos were needed to buy a dollar in Mexico City. Tuesday, a dollar could be purchased for 670 pesos; by Wednesday morning, the figure had dropped to 620 pesos.

In New York, shares of major U.S. banks with sizable Mexican exposure recovered some of the ground that they lost in heavy trading Monday and Tuesday. Shares of Citicorp, Manufacturers Hanover, J. P Morgan & Co. and Chemical New York all rose in New York Stock Exchange trading Wednesday.

“On the psychological level, it was necessary to show that a confrontation could be avoided,” a Western diplomat in Mexico City said.

A recent series of events in Mexico City fueled speculation that De la Madrid was about to declare a debt moratorium, an event feared by bankers and foreign finance officials because it might inspire dozens of other Third World debtors to follow suit and threaten the health of the world financial system.

First, Finance Minister Jesus Silva Herzog announced that Mexico, for the first time, was on the verge of delaying payments. It was the first time that a high official in the De la Madrid administration had mentioned such a possibility.

Then on Monday, top labor leader Fidel Velasquez said his 4-million-member union would fully support the government in the event of a moratorium.

Finally, De la Madrid scheduled a television appearance for Tuesday evening, spawning rumors that he was about to announce that Mexico would stop payments.

But the television appearance proved anticlimactic. De la Madrid limited himself to repeating a long-held, if vague, position that Mexico’s payments on the debt must be eased to allow the country’s economy to grow.

Expect Intense Pressure

U.S. commercial bankers, who hold about $25 billion of Mexico’s debt, expressed skepticism about the proposed Mexican rescue package but said privately that pressure to go along will be intense.

“The pressure will be exceedingly strong to get a deal done, notwithstanding the fact that the IMF plan is unworkable,” one knowledgeable East Coast banker said. “The U.S. government appears willing to accept an unrealistic program” in order to restart the flow of bank loans to Mexico, which came to a standstill last year after Mexico fell out of compliance with an earlier IMF program.

Several bankers and economists noted that Mexico is unlikely to be able to substantially reduce its budget deficit--currently running at about 13% of GNP--because of low oil prices, lack of funds for investment and a generally stagnant economy. But the IMF will accept Mexico’s promises to cut its budget, even if the pledges are patently impossible to fulfill, because of the political turmoil that could result from a Mexican default and a cutoff of new lending.

“There’s pressure on the IMF to come to an agreement before De la Madrid says he can’t reach an agreement and unlooses all sorts of political forces that can’t be reversed,” said Carl Weinberg, an international economist with the New York investment house Shearson Lehman Bros.

Cut Tax Collections

Mexico’s budget deficit has become increasingly difficult to reduce for a number of reasons. First, it is politically difficult for the government to sell off heavily featherbedded state-owned industries, fire workers and bureaucrats or reduce subsidies that keep food prices and transportation costs low.

Furthermore, the prolonged recession has reduced tax collections. The government also devotes much of its budget to paying off a large internal debt, a fixed cost that for the moment cannot be reduced or erased.

In the medium term, the Mexican economy will show few immediate positive effects from the anticipated new loans, economists and diplomats in Mexico said. Recession, which Mexico has experienced during four of the past five years, will deepen in the remainder of 1986, with a drop in GNP of 2 or 3 percentage points, they said.

Times staff writer Oswald Johnston in Washington contributed to this story.