Smaller U.S. Banks Stall $7.7-Billion Rescue Loan Package for Mexico

Delivery of $7.7 billion in new bank loans to help prop up Mexico’s troubled economy has stalled because of the reluctance of scores of smaller American banks to contribute their share of the money, bankers and government officials said this week.

Mexican and U.S. officials here concur that a number of commercial banks are holding out and refusing to lend the country additional money.

However, officials differ as to the meaning of the delay.

Mexican presidential spokesman Manuel Alonso asserted that the delays were “pure paper work” and that commercial bank money would begin to flow to Mexico in February.

However, an official at the U.S. Embassy in Mexico City said the bank holdouts essentially feel that Mexico is a bad risk. They are skeptical that Mexico will make reforms called for in last year’s agreement with the International Monetary Fund, which was supposed to open the way for the country to receive fresh loans from a worldwide syndicate of 400 banks.

“It’s an old story,” said one American banker who is a reluctant participant in the Mexican loan negotiations. “People are dragging their heels and just hoping it will go away.”

Under the IMF agreement, Mexico pledged to trim public spending, reduce the involvement of government in the economy, remove tariff barriers to foreign trade and otherwise liberalize its economy.

Following adoption of the agreement in October, a steering committee of 13 major U.S. and foreign banks, which negotiates with Mexico on behalf of the world’s commercial banks, pledged to raise $7.7 billion in new loans.

Because the package of bank loans depends on the participation of virtually all banks holding outstanding loans to Mexico, even a few holdouts can delay the entire $7.7-billion package.

Banking industry sources involved in talks on the Mexican loans said 95% of the money for Mexico has been promised. All major U.S., Japanese and European banks have agreed to ante up, sources said.

However, getting the last pieces of the package requires the participation of scores of regional U.S. banks, who have much less at risk than the big multinational banks, many of which have more than $1 billion in loans outstanding to Mexico.

Under terms of the loan agreement, each of the 400 banks must increase its lending to Mexico by 12.9% over the next two years.

Many smaller banks, at least up to now, have said they are not interested in increasing their exposure to Mexico and other troubled Third World borrowers. They are declaring the loans uncollectable and are writing them off their books.

“The resolution of the banks to say, ‘No way; I’ve had it,’ is getting stronger,” said the foreign lending chief of one American regional bank. “This is an inevitable process and it will delay it (the release of the Mexican loan money) longer and longer.”

Another U.S. banker said he and many of his colleagues are also highly skeptical that Mexico will live up to its promises of economic reform.

“We don’t believe their figures and their projections,” this banker said. “We don’t think they know what they’re doing. They have to make significant changes within their system which require strong political will.”

An additional explanation for problems, not only with the Mexico package but loans to Latin America in general, came from the United Nations’ Economic Commission for Latin America and the Caribbean, known by its Spanish acronym CEPAL.

According to a recent CEPAL report, while large banks slightly increased their loan exposure in the region during the past four years, smaller institutions reduced theirs by 17%.

“This reflects the fact that the biggest banks are the relatively most heavily exposed lenders in Latin America, and have been obliged to participate in the so-called forced lending packages that have been part of IMF-sponsored adjustment programs and the debt rescheduling exercises,” the report said.

“The smaller- and medium-sized institutions are much less heavily exposed in the region, have had less incentive to participate in forced lending and have, therefore, been reducing their exposure absolutely whenever possible,” it added.

It was not clear whether the recent decision of Republic National Bank of New York to give up on trying to collect some of its loans to Mexico would hinder progress toward putting together the new money package.

Accepted Losses

Republic sold $2 million of Third World debt during the fourth quarter of 1986 and took a $38-million writedown of its loans to Mexico, saying essentially that the loans were worth only a fraction of their value on Republic’s books.

Republic still is owed more than $200 million by Mexico.

At the least, observers here said, the writedown has a psychological effect on banks that are hesitant to lend new money to Mexico.

“This comes at an interesting time,” said one Western diplomat in Mexico City who tracks the debt issue. “It makes the job of convincing banks to get on board all the more difficult.”

The delay in getting fresh money--needed partly to allow Mexico to import needed capital goods and partly to assure continued interest payments on its $100-billion foreign debt--could revive talk of canceling the debt here if it causes Mexico’s foreign exchange reserves to dry up. So far, however, Mexico’s reserves have remained relatively stable at about $6 billion.

The reserves have been bolstered, analysts say, by the return of dollars held abroad by Mexican citizens and companies. Mexican investors are repatriating dollars because interest rates here are high while in the United States they have been falling.

Moreover, prices for oil, Mexico’s leading source of foreign exchange, have crept higher.

Recently Mexico announced that it would cut its sales of oil abroad to 1.3 million barrels a day from the traditional 1.5 million barrels, in line with the decision by members of the Organization of Petroleum Exporting Countries to reduce exports in an effort to drive oil prices upward.

The announced cut represented no particular sacrifice for Mexico. During the first nine months of 1986, the country actually sold an average of only 1.2 million barrels a day to foreign buyers, according to the Bank of Mexico.

Dan Williams reported from Mexico City and John M. Broder from Los Angeles.