IMF to Grant $4 Billion in Loans to Mexico : Agreement Sets Stage for Negotiations to Reduce Commercial Bank Debt

Mexico announced Tuesday that it has reached an agreement for $4 billion in loans from the International Monetary Fund, paving the way for negotiations with commercial banks and for Mexico to become the first beneficiary of U.S. Treasury Secretary Nicholas F. Brady’s debt-reduction plan.

The accord with the IMF marked a victory for the government of President Carlos Salinas de Gortari, which had been hoping for a sign of debt relief from foreign creditors to bolster its standing at home.

The IMF agreement should make it easier for the government to meet a July 31 deadline to renegotiate a wage-and-price-control pact that is at the heart of its economic reform program.

Mexican Treasury Secretary Pedro Aspe said Mexico will receive a three-year, $3.64-billion loan. He said the government expects another $500-million loan from the IMF in 1989 to compensate for foreign currency lost through lower oil prices during the past few years.

Aspe said that a similar agreement with the World Bank is to follow soon and that he will begin negotiations with commercial banks on April 19. Mexico is seeking a total of $7 billion a year in new loans or reductions on its $102-billion foreign debt.

Although bankers have made no promises to Mexico, they have indicated privately that they expect the talks to go smoothly. Aspe said the IMF agreement “will be a factor that plays in our favor” in negotiations with the commercial banks.

The accord with Mexico was the first that the 151-country IMF has completed since the Brady initiative was outlined on March 10. In line with the plan, the IMF indicated that Mexico could use a substantial portion of the money to underwrite debt reduction efforts, such as exchanging fresh government securities in return for banks’ discounting their loans.

The Bush Administration has been eager to find a country that can benefit from the plan to prove the credibility of the proposal to other Third World countries. Many critics have charged that the plan is inadequate.

Reduced Public Spending

Aspe called the agreement “an endorsement of Mexico’s economic strategy,” and added, “It is a recognition by the international community of the efforts this country has made in the way of economic stabilization and structural change.”

A wage-and-price-control pact for the past 1 1/2 years has brought triple-digit inflation down to about 55% last year and a projected 18%-25% this year.

Over the past six years, the Mexican government has dramatically reduced public spending through layoffs and the sale of state-owned businesses. It has opened the country’s borders to imports and is in the process of liberalizing foreign investment.

It is unlikely that any other Latin American country could quickly reach such a favorable agreement with the IMF because none has taken such radical steps. Venezuela has been cited as a possibility but would have to undertake major reforms.

The agreement makes no new adjustment demands on Mexico. It recognizes the country’s need to stimulate a stagnant economy and a goal of 6% annual growth by the end of Salinas’ term in 1995.

Mexico says it has been paying 6% of its gross national product annually over the past six years to service its debt. The agreement acknowledges that the net transfer of resources out of the country should be reduced to less than 2%, Aspe said.

The agreement does not require an immediate major devaluation and could help Mexico repatriate the tens of billions of dollars that have fled the country.

“This agreement is very positive for Mexico,” said Rogelio Ramirez de la O, a private economic analyst. In making economic growth a priority, he said, “The IMF is making a U-turn with regards to adjustment programs.”

Mexico last signed a letter of intent for an IMF standby agreement in July, 1986.

Commercial bankers have said they are looking for a “menu” of debt-reduction options from Mexico. The government has floated a plan to banks with four options for reducing medium- and long-term government debt that has met with a favorable preliminary response.

The possibilities include a swap of loans for new securities with the same face value but with interest rates at about half of the 11.5% Mexico now pays and an exchange of existing loans for new securities equal to about half the value, but with interest rates comparable to those Mexico now pays.

Both options would include credit enhancement incentives.

Other possibilities are for new loans, including the capitalization of interest payments.

Times staff writer Art Pine in Washington contributed to this article.