For the second time in six years the United States is riding to the rescue of its troubled southern neighbor, preparing to loan Mexico $3.5 billion to help it cope with new financial problems caused by dropping oil prices and capital flight. The decision is a good one in the short run, but hard choices still lie ahead if the Mexican economy is to get back on its feet for good.
The emergency loan is the largest the United States has ever extended to a debtor nation. Technically it is a "bridge loan," a temporary infusion of funds to tide Mexico over while it negotiates new credits from the International Monetary Fund and the World Bank. Those two agencies are leading the effort to see Mexico through a financial crisis that began in 1982, when its government announced that it was on the brink of default. Back then, the U.S. Treasury contributed $1.8 billion to an emergency Mexican loan package put together by the IMF.
Since then the Mexican government has tried to work its way back to financial health, with only limited success. President Miguel de la Madrid imposed a painful austerity program on the country which included a devaluation of the peso, cutting the value of a Mexican workers' wages by 40% and closing down government enterprises that mean the loss of thousands of jobs. More recently, De la Madrid imposed wage-and-price controls that have finally brought inflation down from 160% a year at the height of the crisis to 1% per month, according to the latest statistics.
But despite the fact Mexico has taken the harsh medicine that its creditors and traditional economists prescribed, its economy has not improved enough in the last six years to overcome the effect of a downward trend in oil prices. Oil remains Mexico's main export, accounting for 41% of its foreign exchange. So the recent drop in oil prices from $15 per barrel to $9.50 limits Mexico's ability to repay an international debt that is approaching $108 billion. Under such circumstances, it would have been hypocritical for the United States and Mexico's other creditors to not help it deal with the unforeseen shortfall in oil revenues.
But, as many respected financial and political analysts have pointed out, loaning Mexico and other indebted nations more money simply so that they can pay back old loans is not a useful strategy in the long run. Something will have to be done to get Mexico out of the cycle of debt in which it is trapped. Along with former Secretary of State Henry A. Kissinger, we believe that at some point enough capital will have to stay in Mexico, rather than being sent out to its many foreign creditors, so that the Mexican economy begins to grow again. How that is to be done without the Mexican government's defaulting on its debts, as some nationalists in Mexico are demanding, is a matter of dispute among international economists. No answer is in sight, so the continuing debt crisis south of the border will remain one of the most difficult challenges facing new presidents in both Washington and Mexico City next year.