ANALYSIS : Mexico’s Calm Call to Renegotiate Debt Is a Warning to U.S.

Mexican President Carlos Salinas de Gortari’s call for immediate renegotiation of Mexico’s $104 billion in foreign loans was a low-key, but important warning from Latin America: The United States’ current strategy on global debt will have to be changed--and soon.

To be sure, the actual words the new Mexican president used in his inaugural address on Thursday did not seem very threatening. Unlike Peru’s defiant Alan Garcia in 1985, Salinas did not seek to limit his country’s debt payments unilaterally.

The negotiations he wants to undertake with commercial banks are to be measured, without hard-and-fast deadlines and numerical demands--and designed to reduce the current drain of resources and allow the country to return to long-term growth. And Salinas dutifully pledged to continue the nation’s push toward free-market policies begun by his predecessor, Miguel de la Madrid. “I will avoid confrontation,” he told his audience in his maiden speech.

Still, the address, coming as it did from a U.S.-educated, free-market Mexican president, suggests that the Bush Administration is going to have to work quickly to reshape the United States’ debt strategy to accommodate its southern neighbors.

“By nature, Salinas is likely to be a lot more cooperative than the other new Latin American leaders who are on the horizon,” said a Wall Street debt analyst who is familiar with the situation. “If he says he’s feeling the heat, the others must be ready to boil.”

What Salinas was saying was that he wants to keep Mexico playing by the rules, but he cannot carry on politically unless he can show debt-weary Mexicans that the economy is finally starting to improve. And that may not be manageable under current U.S. policy.

The debt policy that the United States has been following in recent years has called for a kind of social compact among debtors and creditors: Debtor countries would work to put their economic houses in order; banks would increase lending to help them meet their debt payments and finance new growth, and Washington would manage it all. Each country’s problem would be handled on a case-by-case basis, with no across-the-board forgiveness of debt.

But the strategy, outlined in 1985 by then-Treasury Secretary James A. Baker III, now clearly has stalled. The banks have closed the door on any sizable new lending to Latin America. The countries have started to fall back. And Washington has turned to other problems.

In the meantime, the combination of continued austerity without access to new money has squeezed debtor countries’ economies, strangling the very middle class that the politicians there need to keep the economic restructuring on track.

The result has been a dangerous leftward drift throughout Latin America. Salinas himself barely won this year’s election in Mexico over the left-leaning Cuauhtemoc Cardenas. The left-wing Workers’ Party in Brazil made sweeping gains in last month’s municipal elections.

Serious Challenge

And in Argentina, that fragile new democracy’s first president, Raul Alfonsin, is facing a serious challenge from Peronist leader Carlos Saul Menem, who is revving up for next year’s elections on a platform that boldly advocates a five-year moratorium on debt repayments.

Even usually tepid Venezuela has begun to be critical of its creditors. Carlos Andres Perez, the winner in Sunday’s presidential election, campaigned on a platform that included immediate renegotiation of Venezuelan foreign debt.

Says Jorge Castaneda, a prominent Mexican political scientist: “Latin American societies will vote their governments out of office as long as growth is postponed.”

It is not immediately clear how the Bush Administration will react to the new challenge from Mexico and the other debtor countries.

Top Bush Administration appointees were closely involved in the recent $3.5-billion bridge loan that the United States offered Mexico in October as a gesture to the incoming Salinas government--though not everyone this side of the border approved of the measure.

And Treasury Secretary Nicholas F. Brady has repeatedly mentioned a review of the debt issue as one of his top priorities. Baker, who is expected to continue working on the debt question as secretary of state, also maintains a keen interest.

No one in the Administration wants to abandon the longstanding case-by-case approach to the debt problem. Although some U.S. lawmakers have advocated schemes for massive debt relief, few policy-makers, either here or in Latin America, believe that they would be workable.

U.S. officials insist that, contrary to some analyses, the bridge loan the United States offered Mexico was not a departure from previous practice. The offer was based on condition that Mexico slash its spending still further and repay the loan when it gets World Bank money.

Treasury officials say that none of the $3.5 billion has been disbursed.

But there is a growing feeling among some debt analysts that the current strategy needs to be made more flexible so the Latin countries can resume the economic growth they need but still have the incentive to free up their economies by continuing their restructuring.

The United States has already moved in that direction, easing its demands that countries such as Mexico keep devaluing their currencies, an economically wrenching move designed to discourage imports and make the country’s exports more competitive--but in the process exacerbating inflation and squeezing the middle class. Repeated devaluations would have been standard procedure during earlier stages of the debt problem.

Private analysts have suggested moving toward some broader measures to reduce the size of each country’s debt--either by having banks write down a larger portion of their questionable Latin loans, or by drastically reducing interest premiums.

Right now, however, the debt strategy is in flux. Mexico has quietly begun negotiations for new loans from the World Bank and the International Monetary Fund, but it is not certain whether the two sides can reach an agreement. Neither Brady nor Baker yet has a broader plan.

Quick Action Unlikely

For the moment, Salinas is likely to let his message on the debt issue sink in while he turns his attention to setting up his government.

Despite his talk about moving quickly to begin negotiation with the banks, analysts here do not expect Mexico to launch talks for several weeks--at least until the Christmas season is over. Even then, they are likely to go relatively slowly.

But the odds are that Salinas’ measured but quite pointed speech will accelerate the move in Washington to review the debt issue promptly and place it back on the Administration’s front burner.

“What the new Administration heard from Salinas was that it had better do something quickly,” said a former government official who keeps close tabs on the debt problem. “It’s going to have to be a priority starting on Jan. 21.”