U.S. Bond Issue Will Aid Mexico in Paying Debts
The U.S. and Mexican governments Tuesday announced a plan that will help Mexico reduce its crushing $76-billion bank debt, using a novel scheme that could provide a new model for other Latin American nations seeking to ease their own huge debt burdens.
The debt plan requires Mexico to pay about $2 billion in cash for U.S. bonds that the U.S. guarantees to redeem for $10 billion in 20 years.
Mexico, in turn, will issue its own bonds using the $10-billion value as collateral and offer the bonds to its creditor banks in exchange for as much as $13 billion to $15 billion of its existing unsecured debt, analysts estimated.
Unlike Mexico’s current debt, which is unlikely ever to be repaid in full, repayment of the principal on the new Mexican bonds would be guaranteed by the U.S. government.
‘The Missing Piece’
“This clearly is the missing piece in the (Latin American) debt strategy,” said Alan Stoga, a leading international economist at Kissinger Associates in New York. “It will actually reduce the outstanding burden of Mexico’s debt and is the first time the U.S. has used anything as creative to benefit a major debtor nation.”
The complex plan, which the Treasury Department described as “beneficial both to the U.S. and Mexico,” involves selling up to $10 billion in special zero-coupon U.S. bonds to the Mexican government at the current value of about $2 billion. The Mexican government could then use that $10 billion in guaranteed value to buy back outstanding loans from its creditor banks.
Analysts said the plan could save Mexico more than $200 million in annual interest costs on its bank debt.
The eventual repayment of the bonds theoretically would be without cost to U.S. taxpayers because $10 billion is the current market value on the use of $2 billion for 20 years. The United States, in effect, would pay all accrued interest at the time the bonds matured.
“I consider this a major turning point in the debt crisis,” said Richard Feinberg of the Overseas Development Council, a nonprofit organization here specializing in Third World issues. “It indicates that Treasury is responding to the rising pressures from Latin America for a new deal on debt.”
Until now, the Administration had opposed playing any role in helping Latin American debtor nations escape their obligations to commercial banks, contending it would encourage economic irresponsibility. However, its opposition has softened amid threats from Brazil and Argentina to refuse to meet their interest payments because their debts had grown unbearable.
Analysts pointed out that Mexico, which easily can pay the $2 billion for the bonds because it has more than $11 billion in foreign exchange reserves, is in a better position than most other Latin American nations to take advantage of the complex new plan. But Brazil, Argentina and other major debtors might be able to work out somewhat different “financial engineering” plans to reduce some of their current debt obligations.
“This may be a modest innovation but it is helpful,” said William Cline of the Institute for International Economics here. “Everybody is a winner under this approach.”
Lured by that U.S. backing and the interest that Mexico would offer on its bonds, many banks are expected to trade some of their current loans at a loss of between 25% and 40% to obtain the new bonds, bankers said.
Many banks, following the lead of New York’s Citibank earlier this year, have already established large reserves to help absorb most of the losses they expect from the shaky loans. In the new arrangement, the banks would officially write off some of their Mexican debt and, in addition to receiving the new bonds, would get tax deductions on their losses.
Mexico’s debt currently trades for only about 50 cents on the dollar in a relatively tiny market among financial institutions. That means, for example, that private speculators can receive $100 million in Mexican debt from banks willing to sell it for about $50 million in cash.
Expanding Limited Cash
The Mexican government, bankers and analysts said, cannot fully take advantage of this discount because it does not have the cash to make large-scale trades. The new U.S.-backed bonds allow the Mexicans to expand the value of their limited cash.
“The key will be how eager the banks are to accept these new securities,” said an officer at a major regional bank. “But, regardless of the discount (on the loans), it will establish for the first time the principle of debt forgiveness. That is a major step toward recognizing the reality that lenders will have to share the cost with the debtor nations.”
The new bonds to be issued by Mexico, based on the value of the U.S. bonds it receives, will pay interest twice a year at a floating rate that will be 1 5/8 percentage points above the rate banks charge one another for short-term loans in the international market. That is almost a full percentage point higher than the 13/16ths of a percentage point above the so-called London interbank offered rate that Mexico currently pays on its bank debt. Analysts said that should make the bonds attractive.
By providing the collateral for repayment of the new Mexican bonds, analysts said, the Reagan Administration is signaling to other debtors that it will go out of its way to help countries like Mexico that have accepted harsh economic adjustment plans and have continued to negotiate with lenders instead of unilaterally attempting to escape their foreign debts.
But economists pointed out that the new approach does not mean that the U.S. government is agreeing to bail out either banks or debtor nations. “This is not a formal bailout and the U.S. government is not assuming any new risk,” said Feinberg. But, ". . . it does mean that the Administration is endorsing debt write-downs, a move that the big money center banks have always opposed.”