Bridge Loan to Mexico: Bailing Out the Lenders?

On a hot three-day August weekend in 1982 in Washington, a $2.5-billion rescue package was hammered out for Mexico, which had just declared insolvency. In return, American farmers sold grain and the U.S. strategic petroleum reserve got Mexican oil at a concessionary price.

In October, 1988, six years later, after a few hours of conversation, a $3.5-billion rescue package for Mexico was granted by the U.S. government. The American people got the assurance that there would be no major disruptions in Mexico as its new president took office.

Since 1982, about one-third of the member countries of the United Nations have obtained countless restructurings, reschedulings and “rescue” packages from their creditors. The banks are better off (with some exceptions), the countries and their people are worse off (with fewer exceptions).

This is called progress by a handful of U.S. and British officials and a small number of American money-center banks. It is called insanity by everyone else, including the 46 World Bank officials who are in Mexico desperately searching for ways to grant credits to Mexico so that it can pay back the U.S. “bridge” loan.

U.S. officials note that the Mexican government is in the process of implementing a series of far-reaching economic reforms. These include privatizing large numbers of state-owned industries, eliminating restrictions on foreign investment, reducing the fiscal deficit and removing most foreign trade restrictions. U.S. officials argue that the bridge loan, which will be funded from the Treasury’s exchange stabilization fund and the Federal Reserve Board’s currency swap lines, is designed to encourage President Carlos Salinas de Gortari to continue with the current reform program. A second and equally important motive, they admit privately, is to demonstrate to the left-wing political opposition inside Mexico that the Salinas regime will have the full political and financial backing of the United States. The message is particularly aimed at Cuauhtemoc Cardenas, whose presidential campaign included the pledge--or threat--to default on Mexico’s foreign debt.

The Mexican government would rather not admit its need for U.S. financial support. The government party’s “economic solidarity pact”--involving unions, business and other key sectors--has been an enormous political success but a dismal economic failure. Although it has not revived economic growth, the policy of freezing prices, wages and the exchange rate has suppressed inflation and created the illusion that some semblance of financial stability was being restored. However, the bills for that economic mirage are now coming due, and Salinas took office calling for renegotiation with foreign commercial lenders. Virtually everyone agrees that there are no near-term prospects for improvement in the Mexican economy. U.S. officials, therefore, hope that the $3.5-billion bridge loan will bolster the country’s dwindling reserves and prevent an outright financial panic.

Finally, falling oil prices and rising interest payments have made life much harder for Mexico. Oil prices have been weak and interest rates have increased. As a result, Mexico’s external deficit next year could easily swell by as much as $3.5 billion. The bridge loan would also compensate Mexico for those unforeseen events. Thus the emergency loan is not so much a reward for good behavior as a last-ditch effort to keep Mexico’s deteriorating economic situation from collapsing. Whether it will succeed remains to be seen, although it is doubtful that increasing Mexico’s debt by $3.5 billion will solve its problems.

There are several facets of the transaction that merit investigation:

--How will the loan proceeds be used? If they are used to defend the peso, the United States will be countenancing a policy of artificially suppressing inflation by deliberately overvaluing the currency. This is precisely the sort of policy that got many Latin American countries into trouble during the 1970s. And if the peso is overvalued, how can the Mexicans be expected to repay the new World Bank and International Monetary Fund loans that are supposedly forthcoming?

--Previous World Bank and IMF loans were explicitly linked to new lending programs by commercial banks. This time such loans were not mentioned. Does this imply that in the future public-sector funds will be filling the entire financing gap?

--Is the bridge loan a commercial bank bailout? The Reagan Administration has dismissed congressional calls for debt relief as tantamount to a taxpayer bailout of the commercial banks. But if the U.S. bridge loan is used to pay interest to commercial banks, many in Congress will argue that Reagan Administration officials, and not the proponents of debt relief, are the ones using taxpayer funds to bail out the banks. If that proves to be the case, then the advocates of having the commercial banks write off and absorb requisite portions of debt will be able to argue more forcefully that their approach is actually a less expensive proposition for U.S. taxpayers. Paul Conrad is on vacation.