Toughened by Austerity, Mexico Has Earned Debt Relief

During the early stages of the peace negotiations between the United States and North Vietnam, the big issue was the shape of the table. Now, in the negotiations between Mexico and its commercial bank creditors, the table is also at issue--not its shape but the seating arrangement. It is a high-stakes game of chairs.

Usually, a debtor, especially one in desperate straits, finds itself on the other side of a formidable desk or table from its banker. But Mexico’s relationship with its creditors is not a typical one. Mexico is not in default on any of its loans. In fact, some of Mexico’s close friends (I am one) have watched with pleasure, if not surprise, the development of Mexico’s well-earned reputation as an ideal debtor.

Mexico has learned to live with the austerity of the guidelines imposed by the International Monetary Fund. For six years, Mexico has had a virtually no-growth economy, with a roughly 50% net loss of real income for poor, blue-collar and middle classes alike. The people of Mexico have demonstrated admirable patience through this travail, yet one cannot but wonder how much longer this will last.

Mexico’s burgeoning population (an annual increase of nearly 1 million in the potential work force) demands healthy, job-creating growth. This is not possible as long as the cost of debt service exceeds 6% of the gross domestic product and 80% of the value of Mexico’s total exports.

The cost of debt service must be sharply reduced. Both sides of the table have come to realize this. The questions are: How, and by how much, can it be reduced?

While some narrowing of the spread between the two positions is duly noted, the bankers and the Mexican negotiators still find themselves in an adversarial relationship--as on opposite sides of the bargaining table. Yet their goals are not that different. The banks must recognize by now that their self-interest requires a stable, prosperous, growing Mexican economy. Only in this happy circumstance can they hope to recover any substantial amount of their principal and realize a reasonable return on that reduced amount as it is being repaid.

When I was U.S. ambassador to Mexico, I never found any conflict of interest in working on behalf of the United States to encourage a prosperous, democratic, stable Mexico. What was good for Mexico, on most issues, also was in the best interest of the United States.

The commercial bankers are in a similar situation. The Bush Administration’s Brady Plan has acknowledged the need for reducing the principal of Third World debt. The banks themselves, during the recent period when debt-for-equity swaps were being used to encourage foreign investment in Mexico, created a secondary market for Mexican obligations. That market currently values Mexico’s sovereign debt at less than 50 cents on the dollar.

Time is running out. The narrow and hotly disputed election victory of President Carlos Salinas de Gortari last July indicated that Mexicans’ traditional acceptance of their economic plight may be nearing the breaking point.

Salinas’ every move in office has strengthened his credibility and restored Mexicans’ confidence that the system can be made to work. But he needs a successful resolution of the debt crisis--and soon. Mexico’s foreign reserves are being depleted. There are suggestions in some news reports that support may be eroding for the responsible, nonconfrontational position that Mexican debt negotiators have taken.

Last month, President Salinas again displayed effective leadership by hammering out a renewal of the anti-inflation pact with labor and business. This policy has, in recent years, reduced Mexico’s annual rate of inflation from nearly 160% to about 19%. Many felt that a new pact could not be achieved prior to a resolution of the debt crisis. The fact that it has strengthens the negotiating position of Mexico. But the president still needs to get this critical issue behind him.

A workable solution of the debt crisis would encourage the return to Mexico of domestic capital that has moved abroad. A breakdown of negotiations or a protracted delay of the debt’s resolution could have the opposite effect.

We hear that some banks are continuing to push for a renewal of debt-for-equity swaps. The Salinas administration feels that swaps are unacceptably inflationary and it has no intention of renewing this program. But the remote possibility that the banks might eventually prevail with equity swaps is, no doubt, keeping on hold many major job-creating foreign investments.

If the Brady Plan, in its present form, does not provide a sufficient carrot-and-stick to get the banks off dead center, the Bush Administration must find other ways to put additional pressure on the banks. To do less risks our well-developed and many-faceted relationship with our most important southern neighbor.

The value of preserving a friendly, stable, prosperous, democratic Mexico on the other side of the 2,000-mile land border that we share is incalculable. It far exceeds whatever it would cost to get the bankers and the Mexicans to the same side of the table.