Mexico Balances Growth, Solvency in Negotiating Debt Plan

President Carlos Salinas de Gortari has staked his reputation on his government’s ability to negotiate a substantial reduction in Mexico’s $102-billion foreign debt, and officials say he must do so by the end of July, when an anti-inflation package of wage and price controls expires.

Treasury Secretary Pedro Aspe Armella has visited the United States, Canada and Japan to put forth the Mexican government’s position that the $10 billion a year that Mexico pays to service its debt is a major obstacle to economic growth and must be reduced. Fernando Solana Morales, Mexico’s secretary of foreign relations, was in Washington this week on a similar mission.

At a meeting of the Inter-American Development Bank in Amsterdam this week, Aspe applauded a new U.S. policy emphasizing debt relief. But “for us, solutions must be found quickly,” he said. “It is obvious that our people cannot and should not wait any longer.”

When U.S. Treasury Secretary Nicholas F. Brady announced the new policy earlier this month, the Mexican government called it “a positive response to the proposals Mexico’s negotiators have been making.” Bankers and economists said the new policy made it unlikely for the time being that Mexico would declare a moratorium on debt payments.

Threatened to Halt Payments

But in the weeks since, economic analysts have grown wary of the newly powerful role of the International Monetary Fund that is implicit in the plan and are impatient for details. They say the sketchy plan offers fewer specifics than the Mexican government had hoped for by this time, nearly four months into Salinas’ term and three months into President Bush’s.

“This is a proposal of good intentions, but it falls short of the dimensions of the problem in the world and in Mexico,” said economist Rosario Green, co-director of the private Bilateral Commission on U.S.-Mexico Relations.

“The Brady plan proposes more supervision by the IMF, which in the end is more of the same. The IMF conditions a reduction of debt on a policy of adjustment (austerity). Either there is a new proposal by the creditors, or Mexico is not going to be able to grow.”

When he was campaigning for election last year, Salinas threatened to halt debt payments if they prevented Mexico’s stagnant economy from growing. After his relatively poor showing at the polls, the lowest ever for a ruling-party presidential candidate, bankers feared that he would succumb to pressure from a newly strengthened leftist opposition and take radical steps.

Instead, officials of Salinas’ government took to the road to meet with foreign governments. The Mexican government has been pushing for a six-year agreement combining debt relief with new loans to reduce the “net transfer of resources” by $7 billion a year, a total of $42 billion.

Bankers Irked

For the past six years, officials say, Mexico has paid 6% of its gross national product to service the debt. They want to bring that down to about 2%. Such a reduction is essential, they say, to reach the annual growth of 4.5% that is needed to get the economy back on its feet and the ruling Institutional Revolutionary Party back in the good graces of most Mexicans.

“From the beginning,” Green said, “Salinas tried to show that there would be no unilateral measures. He tried to establish a negotiation, but one that leaves the door open if circumstances dictate otherwise. The Brady plan says to the Mexican government, ‘We are going to help you dialogue with the banks, but there are no guarantees.’ This generates space. It buys time.”

While commercial bankers feel temporary relief from the threat of a moratorium, they are irked because they have been unable to meet with Mexican officials.

“We have tried to contact authorities, but we get no answer,” said one American banker, asking not to be identified by name. “They have tried to make an economic problem a political problem, and to involve other countries . . . to pressure banks into accepting terms that, from an economic point of view, are not acceptable.”

The bankers expect Mexican officials to agree to talks after Aspe returns from Europe.

They say that they, too, are waiting for more details of the Brady plan--specifically, what percentage of debt reduction he contemplates and what kind of guarantees they will get from multinational institutions for the remaining debt. They add that they would like to see a “menu” of debt-reducing options from the Mexican government.

U.S. and Japanese bankers are pressing hard for debt-for-equity swaps and for access to financial services markets in Mexico.

Opened to Imports

In Amsterdam, Aspe adamantly opposed swaps. He said they are inflationary and inhibit investment, and he argued that they amount to a subsidy to foreign investors when Mexico is under pressure to reduce subsidies that aid the poor. But he said swaps may be offered for investments that require a fiscal incentive or for assets that the government wants to sell.

Mexican officials say the IMF cannot demand any more major austerity measures because Mexico already has made more sacrifices than any other country in Latin America. It has dramatically reduced government spending through layoffs, as well as eliminated most subsidies and sold off hundreds of state-owned companies.

Mexico has been opened to imports by the elimination of most tariffs and the reduction of those that remain from 100% to a maximum of 20%. Officials say that in the coming weeks they will publish new regulations liberalizing foreign investment.

Economics analyst Rogelio Ramirez de la O, however, points to Mexico’s current account deficit--$3.3 billion last year and expected to be higher for 1989. “The IMF has a structural mission to preserve international payments on an orderly basis,” Ramirez said. “The IMF is not going to be happy about Mexico’s current account deficit.”

U.S. officials seem satisfied with the changes in the Mexican economy but question the need for $7 billion a year in debt relief. They say this figure was based on an average price of $10 a barrel for Mexico’s oil, which they consider low, and on 11% growth in imports this year, which they believe is high.

“If the economy is going to recover, why do they need $7 billion in relief for 1995?” an American source asked.

U.S. officials and banks emphasize that Mexico must come up with a way to repatriate capital that has fled the country--as much as $40 billion to $60 billion, by some estimates. Mexico, in turn, argues that the money will not come home until there is a debt agreement to bolster confidence in the Mexican economy.

Likewise, Mexican officials argue that they will not be able to negotiate a new anti-inflation pact with businessmen and unions unless they have a debt agreement by July. The pact has brought inflation down from more than 50% last year to the 18%-to-25% range this year--but businessmen are pressing the government to lift price controls, and disgruntled workers are struggling with wages, the value of which has been eroded by 50% over the last six years.

The left, led by former presidential candidate Cuauhtemoc Cardenas, continues to push for a unilateral halt in debt payments before any negotiation.

Mexico’s reserves have dropped dramatically from a high of $16 billion last spring, analysts said. The government announces its reserves only twice a year, but several economists estimate that they are now about $8 billion; one put the figure as low as $4 billion to $5 billion.

Without a debt agreement, Ramirez says more capital will flee the country in fear of a devaluation.