Mexico Deserves a Break

Like marathon runners trying to preserve their strength, representatives of the Mexican government and several major commercial banks this week temporarily suspended negotiations on ways to reduce Mexico’s massive foreign debt. It may let them catch their breath, but it isn’t getting them closer to the finish line.

The finish line is a debt-reduction agreement that both sides can live with. At this point, most neutral analysts sympathize with Mexico’s position. The government of President Carlos Salinas de Gortari argues that Mexico not only deserves a break in paying back the $54 billion it owes private banks (all told, Mexico owes $102 billion to foreign creditors), but has actually earned a break.

Indeed, since Latin America’s debt problems reached crisis proportions in 1982, Mexico has been a model debtor. It has accepted the austerity demanded by its foreign creditors, halving the buying power of the typical Mexican wage-earner as one price of whipping inflation. To help balance its books, the government has slashed spending on such fundamental needs as education and health. Most recently, Salinas has liberalized the nation’s economy, selling off state-run companies and opening the country to more foreign investment. Despite that record, the international banks have been no more generous with Mexico than with difficult debtors like Brazil and Argentina.

In fairness to the banks, hammering out a Mexican agreement that all of them like cannot be an easy process. The committee looking out for their interests in the negotiations includes representatives from the United States, Japan and Europe. And some banks are in a better position than others to absorb short-term losses that could result from granting Mexico’s debt-reduction request. But other equally diverse groups in international finance recognize that Mexico needs a breather, and are doing what they can to help. They include the International Monetary Fund, the World Bank and the Paris Club. And the process of negotiating a reduction in the Third World’s debts might never have gotten started without a firm push from the Bush Administration, particularly from U.S. Treasury Secretary James Brady. So there is clearly a consensus that Mexico has reached the limit of its capacity to pay and must now be nursed back to health before permanent damage is done to its economy. Only the commercial banks are holding out.

Mexico began the negotiations by saying that it wanted a 55% reduction in debt. The bankers countered with 15%. In two months of meetings, the gap has narrowed a little, with Mexico’s demand down to 45% and the banks’ counteroffer up to 22%. Given the harsh reality that the market value of the Mexican debt is approximately 40 cents on the dollar, it is unfair to ask Mexico to accept a compromise figure below 40%. So when the talks resume, the banks must be prepared to concede even more than they already have--and the sooner the finish line is crossed in these marathon negotiations, the better.