U.S. Preparing to Lend Mexico $3.5 Billion

The United States announced Monday that it is prepared to provide Mexico with a record $3.5-billion temporary “bridge” loan to stabilize Mexico’s economy because of its huge loss of export revenue from declining world oil prices.

The early announcement, made before all details were worked out, was intended to dissuade investors from pulling their capital out of the country in anticipation of an economic downturn and to help President-elect Carlos Salinas de Gortari avert new economic and political turmoil before he takes office Dec. 1.

Noting recent progress made in restructuring Mexico’s economy, the Treasury Department said the nation “has established the basic conditions for the renewal of sustained economic growth.”

‘Short-Term Bridge Loan’

The announcement of the impending financing, worked out by negotiators from the two nations, said only that the United States is “prepared to develop a short-term bridge loan.”

There was no official Mexican government comment on the announcement, but there was favorable reaction in Mexico.

Salinas, a career technocrat, has promised to continue the badly needed restructuring program initiated by outgoing President Miguel de la Madrid, but he lacks the broad political base that has allowed his predecessor to make significant reforms.

Last weekend, in an effort to calm jitters in the global financial community, Salinas pledged to continue the fragile social compact with business and labor that De la Madrid put into place and to shore up the economic program by cutting government spending more sharply and tightening money and credit.

He also plans to step up the sale of government-owned industries to the private sector.

Luis Rubio, director of Ibafin, a Mexico City research group, said the wage and price control compact “is viable, and it is showing some result.” Now, he said, it is “critical” for Salinas “to give a clear signal” about what his economic policies will be.

However, the revenue shortfall stemming from the decline in oil prices has placed the government in a serious financial bind that could have triggered rampant capital flight. Estimates that oil revenues will fall $2 billion short of projections have sent the value of the peso plummeting and drained billions from the country’s reserves.

Both U.S. and Mexican officials have feared that a further sharp devaluation, which had been rumored in the currency markets, would disrupt Mexico’s recovery and blow apart the business-labor cooperative effort.

There also have been worries among some commercial bankers that the squeeze might increase pressure on the Salinas administration to default on part of its $104-billion foreign debt, which increasingly has become the subject of major controversy there. The U.S. action is designed to quell those rumors as well.

The $3.5-billion bridge loan from the United States, which would be provided jointly by the Treasury and the Federal Reserve, would be the largest that Washington has approved for any Third World country since August, 1982, when the global debt crisis erupted with Mexico’s announcement then that it was on the brink of default. Most previous short-term loans have been well below $2 billion.

Current Negotiations

Under the terms of the accord, Mexico will repay the loan with money from new loans it expects to receive later this year from the World Bank and the International Monetary Fund. The country currently is negotiating for $1.5 billion to $2 billion in World Bank loans and has applied to the IMF for another several hundred million dollars in emergency loans.

Final approval of the U.S. bridge loan will depend on whether Mexico and the IMF can agree on a new economic plan.

The decline in world oil prices over the last few months, to a low of $9.50 a barrel from $15 a few months ago, has hurt Third World oil-producing countries such as Mexico severely. Although Mexico recently has broadened its export base, oil revenues still make up 41% of its total export earnings.

The oil deficit will be made up by higher earnings from exports of other products, but the government still will be left in a fiscal pinch.

Times staff writer Marjorie Miller contributed to this story from Mexico City.