A Deal on Mexico's Debt?

President Bush has offered Mexico a temporary $1 billion to $2 billion loan to help it reach a debt-reduction agreement with its creditor banks. But that is only the first step--a tentative one at that--towards solving the debt crisis that has kept Mexico in a deep recession for most of this decade.

For several weeks, Mexican government officials have been meeting with representatives of 15 major international banks to hammer out the details of an agreement that would give Mexico a break on an international debt that exceeds $100 billion. More than half of that awesome amount, about $54 billion, is owed to commercial banks like those that made up the negotiating committee. The Mexicans had asked the bankers to voluntarily reduce the value of the commercial debt to more accurately reflect its value on the open market. While the Mexicans had hoped for a debt reduction of 55%, it appears they will have to settle for about 35%. And officials involved in the negotiations say it will be some time before the details of an accord can be made public. Bush's bridge loan will help tide Mexico over until it reaches an agreement with the banks, and the money begins to flow.

The main reason for the slow pace of the debt-reduction process is the sheer complexity of the negotiations. It is hard enough to persuade one bank to write down the value of a major loan. Getting 15 American, Japanese and European banks to do so in concert might be impossible without the political pressure put on the banks by Mexico's friends and allies, including the Bush Administration. Even after an initial agreement is reached, the bankers' committee must persuade hundreds of small and medium-sized banks that have loaned Mexico money to go along with it. Only after all those hurdles are passed can a Mexican loan agreement be scored as an accomplishment for Bush and Treasury Secretary James Brady, who have been urging commercial banks to grant debt relief to Third World countries in exchange for international guarantees on the outstanding balance.

Even then, a 35% reduction in the national debt will leave Mexico only $3 billion more a year to invest in growth, not nearly enough to revive the nation's economy. Much more will be needed if Mexico is to achieve the impressive growth rates it had in the 1960s. The Mexicans realize this, and are proceeding with efforts to liberalize their economy by selling off inefficient state companies, abandoning protectionism and opening themselves up to foreign investment. Mexican financial planners also hope a debt-reduction plan will generate enough public confidence to convince wealthy Mexicans who took their money out of the country when the debt crisis began to bring their flight capital home.

So much remains to be done before Mexico's debt crisis can be considered at an end. And, after the negotiations with Mexico, the banks will have to start meeting with other debtors who have not been as cooperative as the Mexicans, debtors like Brazil, Venezuela, Argentina and Peru. When those talks start, the U.S. government and international financial institutions like the World Bank and International Monetary Fund must be prepared to help keep the momentum for debt-relief going, as they did in the case of Mexico. That will mean offering aid and other incentives to banks that cooperate and imposing sanctions against the banks that don't.

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