U.S. Latin Policy Flounders as Treasury and Fed Collide

The Bush Administration has gotten off to a slow--some say faltering--start in its economic relations with Latin America, and some critics fear that it may dissipate the good will that the President has built up in the region since winning the November election.

Shortly after his election, Bush met with the newly elected Mexican president-to-be, Carlos Salinas de Gortari, and promised that he would stop badgering Mexico publicly to crack down on drug kingpins. He indicated to Salinas that the United States would adopt a kinder, gentler policy on regional economic issues, to Mexico’s advantage.

A few weeks later, at a Dec. 19 press conference, Bush announced that he had ordered a “major review” of the Reagan Administration’s Third World debt strategy with an eye toward helping debtors not only meet their interest payments but also reduce their debt burden.

Since the President took office last month, however, the Administration has been sending decidedly different signals on these and other regional economic issues.

It has moved more slowly than some expected in revamping its Third World debt strategy. And it has taken a harder-than-expected line in negotiations with major debtors, particularly Mexico and Argentina.

Treasury vs. the Fed

That in turn has sparked some resentment among some senior Latin officials, who believe that they have been treated too roughly by the Treasury Department. And it has led to sharp differences between the government’s two major agencies in managing the global debt problem--the Treasury Department, which acts on behalf of the Administration in negotiations with debtor governments, and the independent Federal Reserve, which has traditionally shared authority in this area.

Senior Fed officials are openly worried that the Treasury’s harder-line approach may be jeopardizing prospects that the Administration will be able to succeed in its bid to enhance America’s image and influence in the region. “We’re really pretty amazed at how they’ve been handling this,” one well-placed Fed official said.

Treasury officials deny that there was any friction between them and the Mexicans--or any departure from agreed-upon procedures in processing a temporary $3.5-billion loan to Mexico. “They (the Mexicans) simply didn’t fulfill the conditions,” said a Treasury strategist who requested anonymity. Treasury policy-makers maintain that debtor countries must meet the conditions that lenders set down for such loans or the money will not be used wisely.

The economic issue is an important one in U.S.-Latin American relations. U.S. intelligence officials warn that governments of the big, fragile new democracies--Brazil, Argentina, Venezuela and Mexico in particular--are coming under increasing pressure from leftists, in part over the debt burden and other economic-related issues.

Open Challenges

Some of the region’s new democratic governments are being openly challenged:

- Argentina’s centrist president, Raul Alfonsin, is facing opposition from Peronist candidate Carlos Saul Menem in what some fear could prove an upset in next May’s election.

- In Brazil, where President Jose Sarney is up for reelection in November, the ruling party suffered a clear setback last fall when leftists captured most of the important state and municipal elections.

- Peru’s economic problems, mostly self-inflicted, are so bad that some predict that it will be only a matter of time before the military moves to overthrow populist President Alan Garcia, who heads the country’s first civilian government in modern times.

- And in Venezuela, newly elected President Carlos Andres Perez, historically a left-of-center politician, won office in part over the debt issue and is now urging other debtor nations to take a bolder stance.

The sputtering start in U.S.-Mexican relations has been aggravated by other foreign policy blowups. Mexicans were outraged when Bush Administration officials announced plans to build a four-mile-long ditch on the California-Mexico border to discourage illegal immigrants and drug traffickers.

And leftists have had a field day lambasting Bush’s appointment of John Negroponte as ambassador to Mexico. Negroponte has been heavily involved in U.S. collaboration with the Nicaraguan Contra rebels.

The differences between the Treasury Department and the Fed surfaced earlier this month over the handling of the “bridge” loan to Mexico. The loan was arranged last Oct. 17 as a gesture of U.S. support for incoming President Salinas and as a tool to help stem a run on the peso, which might have wrecked Mexico’s new economic restructuring program.

U.S. and Mexican officials disclosed Feb. 1 that the U.S. loan offer would be allowed to expire unused--in part because, as it turned out, Mexico never needed to draw on it. The mere announcement in October that the loan would be available--combined with a tightening of monetary policy by the Mexican central bank--effectively reversed the mass outflow of capital. Since then, the situation in Mexico has stabilized.

But sharp differences arose over how the bridge loan was handled--specifically after it became known that the Treasury Department never completed the arrangements to put the loan offer into effect.

Treasury officials said the impasse came mainly because the Mexicans had not fulfilled a key condition for obtaining the loan--that they approach the International Monetary Fund about working out an economic restructuring plan.

But the Mexicans--supported by senior officials from the Federal Reserve--say going to the IMF for help would have been required only if Mexico’s reserves had fallen further, below a specific trigger-point on which both countries had agreed in advance.

Although the loan offer itself was mainly symbolic, some Mexicans view Washington’s failure to complete the paper work as a kind of bad faith and feel that the United States changed the rules in midstream.

The Center for Private Sector Economic Studies, a Mexico City research group, has reported that foreign funds invested in Mexico plummeted 50% in 1988 to about $8 billion. The outflow was reversed after the government announced its new economic program, however, and about $700 million flowed back into the country in January. The group based its report on statistics compiled by the government and Mexico’s central bank.

Waiting for Program

The Treasury-Fed differences also involve Washington’s refusal so far to provide relief for Argentina, either through a loan from the IMF or the World Bank or from a Treasury-backed bridge loan.

Treasury officials say they will be willing to go along as soon as the Argentines come up with an economic program that is more anti-inflationary than the most recent one proposed by Alfonsin. Fed officials, while conceding that Alfonsin’s latest program is not the most stringent ever proposed, argue that it may be all that is politically feasible.

One Fed official notes tersely that it would seem to be in the best interest of the United States to support Alfonsin against his challenge from the Peronists. “We just have to wonder” what the Treasury is thinking on this issue, this official said.

Critics say Treasury Secretary Nicholas F. Brady has been upholding the Treasury position steadfastly, despite informal entreaties from senior Fed officials. Former Treasury Secretary James A. Baker III, who was expected to elevate the debt problem as a geopolitical issue in his new job as secretary of state, has taken himself out of any major role in debt policy. Aides say Baker believes that Treasury should be left alone to take the lead.

The review of the U.S. global debt strategy is proceeding steadily, if slowly, and at a meeting Feb. 3, finance ministers and central bankers from the United States and its six largest economic allies gave the go-ahead to deputies to explore new avenues of approach. At the same time, they cautioned that there would be no sweeping changes anytime soon.

Within the Administration, some Treasury officials have been promoting a plan that would encourage banks to discount much of their loans to Latin American debtors, allowing them to reduce their total debt burdens.

However, the proposal, still only in rough form, has been rejected by a Cabinet-level task force on grounds that it would eliminate any pressure on the debtor countries to make needed economic reforms. Discussions are continuing.