Lending Mexico a Hand

The loan agreement that Mexico signed last week with three international finance agencies gives the nation more time to pay its $98-billion foreign debt. Part of the price that it will pay for the money is harsh austerity for an already poor population, and Mexico still will need concessions from its creditors to avoid collapsing before it can work its way out of debt.

Under its agreement with the International Monetary Fund, the World Bank and the Inter-American Development Bank, Mexico will get emergency loans and other lines of credit worth more than $3.6 billion over the next 18 months.

In exchange, the government of President Miguel de la Madrid will institute more of the austerity measures that the IMF has demanded of Mexico since 1982, when the country’s shaky financial situation took a turn for the worse.

But there are breaks for Mexico in the new agreement. Some of the spending cuts will not have to go into effect until 1987. More important still, future aid from the IMF has been tied to the price of oil--Mexico’s most important export commodity, which provides more than 70% of its foreign exchange. Under the agreement, if oil prices continue to drop, the IMF will extend more emergency credit to Mexico. If oil prices rise, less new money will be forthcoming.

The IMF agreement is vital because the Mexicans will use it to seek additional credit from commercial banks in the United States and Europe, which have been reluctant to lend any more money to Mexico. The concessions that IMF negotiators gave Mexico should also set a precedent for concessions by commercial banks.

On this point a recent proposal by Sen. Bill Bradley (D-N.J.) is worth considering. Bradley suggests that the banks lower their interest rates for Mexico and other Latin debtors, and forgive some of their loan principal, over a period of three years. This could cause short-term losses for some banks, but in the long run it would strengthen their position by relieving the fear of default by a major debtor like Mexico. Bradley’s provocative proposal is at least worth discussing when the commercial banks begin negotiating with Mexico about new loans. So far the commercial banks that hold Mexico’s debts have resisted suggestions that they share the pain that Mexico’s financial troubles have caused for its government and people. But the debt problem is at least partly their responsibility, because of imprudent loans that the bankers made during Mexico’s oil boom of the 1970s.

The De la Madrid government will ask for $9 billion in new commercial loans, arguing that this is the minimum amount needed to stimulate new growth and restore confidence in the Mexican economy. At a ceremony with the IMF officials last week, Mexican Finance Minister Gustavo Petricioli said that new loans in that amount would enable Mexico to resume economic growth in 1987 at a rate of 3% to 4%--a very optimistic prediction, considering the fact that Mexico’s growth rate is expected to decline by 4% this year. But optimism underlies the entire Mexican rescue package--a belief that Mexico’s economy is fundamentally sound and will boom again once it becomes more open, competitive and modern.

The concessions to Mexico indicate that IMF officials believe that De la Madrid is moving in that direction and plans to stay the course. Now commercial banks should make a similar gesture.