Mexico’s Debt ‘Rescue’ Is the Frailest of Lifelines

The most recent installment in the never-ending saga of Mexico’s foreign debt predicament came to an end last week with something to satisfy everyone--supposedly. The country’s private creditors finally agreed to provide the $6 billion in new loans that Washington promised to obtain last summer, when Mexico came close to suspending payments on its $95-billion debt. Another $6 billion was pledged by the International Monetary Fund, the World Bank and other Western government sources. And Mexico obtained a reduction of 5/16 of a percentage point on the interest spread on its old debt. In return, President Miguel de la Madrid agreed to shelve his demands for substantial interest relief and profound changes in the industrialized countries’ and banks’ approach to the Latin American debt crisis.

Last June the Reagan Administration had committed itself to press for innovation in the terms of Mexico’s agreement with the IMF, as well as for concessions to Mexico on the interest spread and maturity on both its outstanding debts and new loans. Mexico, for its part, agreed to pursue and possibly intensify “structural reform” in its economy. Thus a provision for economic growth and protection of Mexico’s finances from another plunge in oil prices was built into the IMF letter of intent, much to the displeasure of the fund’s staff.

In the end, Mexico got its money, the banks will keep receiving their interest payments, and the Reagan Administration made the much-lauded “Baker plan” look like a workable policy.

In fact, this bail-out only drives Mexico deeper into debt and postpones any lasting solution at least until the end of De la Madrid’s term in late 1988. By then, Mexico’s foreign debt will total between $112 billion and $115 billion. In real terms, it will be roughly equal to what it was in August, 1982, when the debt crisis began. As a share of gross national product, the debt has also remained stable, hovering at approximately 60%. And the economic growth that is now envisioned for the next two years will only compensate, at best, for the drastic 5% or 6% contraction in the economy this year.

So, from whichever vantage point one looks at it, Mexico has not “grown out of debt”; it is right back where it started. Except, of course, for the fact that the Mexican people have suffered a 40% decline in real wages, and by 1988 their national treasury will have paid out more than $45 billion in interest, far more than Mexico has received in new lending.

Perhaps the most serious defect of the new package is precisely that it locks in Mexico’s next transfer of resources abroad. In 1986 and 1987, according to the terms of the arrangement, Mexico will receive between $5 billion and $6 billion yearly, depending on the rate of disbursement. But it has paid more than $4 billion in interest during the first half of this year alone; if interest rates stay the same, its interest bill this year and next will total about $16 billion--for a net loss of $3.5 billion to $4 billion. These figures do not include amortization of other parts of Mexico’s debt or losses due to capital flight. Nor do they take into account the fact that by 1988, Mexico will have to pay interest at commercial rates on the new $6 billion and at concessional rates on the rest, which will add $600 million to $700 million to its yearly interest bill.

Mexico is being bled into permanent economic stagnation.

If new indebtedness were the price to pay for returning to high rates--6% to 7%--of sustained economic growth, the game might be well worth the candle. Sadly, this is not in the cards. Even by the Mexican government’s own estimates, in the best of cases the economy will grow 3% or 4% next year, and the same amount in 1988. This will barely balance the expected drop in gross national product of at least 4%, and possibly as much as 7%, this year. Of course, in per-capita terms a 3% growth in the economy is practically negligible, and in aggregate terms it is nowhere near enough to generate employment for the million Mexican youths entering the job market each year.

Worst of all, perhaps, the new “rescue” comes as De la Madrid enters the last two years of his administration, traditionally a time when Mexico’s chief executives devote themselves to ensuring a smooth succession, even as their power progressively diminishes. It seems safe to say that while Mexico may request more money in 1988, it will not raise the specter of unilateral action or put new solutions on the bargaining table until the waning months of De la Madrid’s term.

With the exception of the Reagan Administration, none of the parties to this entire affair is particularly enthusiastic. The banks are not enthralled by the prospect of lending more money to a doubtful risk. Mexico’s government is uneasy, to say the least, about taking on more debt. And the IMF and World Bank are too experienced and competent, whatever their other defects, to believe that there’s much mileage in the new patch on the worn Mexican tire.

Taken altogether, this seems like an exorbitant price to pay just to maintain the fiction that the Baker plan, stillborn when first presented to the IMF/World Bank in Seoul last October, is alive and well in Mexico City.