Mexico Reaches Accord on Restructuring Debt : Agreement With Foreign Lenders to Provide New Loans, Will Ease Nation’s Overall Burden

Mexico reached agreement in principle with foreign governments and banks Sunday on a massive new debt financing package--the first under the new Third World debt-reduction strategy proposed last March by U.S. Treasury Secretary Nicholas F. Brady.

The landmark accord, which will provide the Mexican government with some $3 billion in new loans and debt relief over three years, will for the first time reduce both the country’s overall debt burden and the amount it must pay foreign creditors each year. The $3-billion-plus figure will come from a mixture of about half new loans and half debt relief.

The idea is to ease Mexico’s debt burden enough to enable the government to finance its planned overhaul of the economy and still allow for economic growth. Under the previous Third World debt plan, the country’s overall debt burden steadily increased.

The accord was viewed as a victory for Brady and the Bush Administration, which had hoped to portray the Mexican agreement as a “test case” of the secretary’s new debt-reduction plan. It also was expected to bolster politically the government of President Carlos Salinas de Gortari, whose party has been in increasing difficulty at home.

The pact was announced jointly late Sunday by Salinas and a 15-member Bank Advisory Committee, which represents 500 U.S. and foreign commercial banks that have been lending regularly to Mexico over the past decade.

Both U.S. and Mexican officials hailed the new accord as a major turning point in the seven-year-old global debt problem and said they expect it to serve as a precedent for applying the new Brady Plan, as the debt-reduction proposal is known, to other large Latin American debtors. Venezuela already has begun negotiations with commercial banks.

Brady said the agreement is “a major step forward in the implementation of the strengthened (U.S.) debt strategy.” He said it would provide “significant debt- and debt-service reduction for Mexico as well as new money to support Mexico’s economic growth.”

President Salinas announced the agreement in a nationally televised speech, saying it evolved out of one of the most “complex and tense negotiations” in the history of Mexico and international finance.

“This opens the trail that other countries with similar problems can convert into a road,” Salinas said in his 15-minute speech.

He warned the country, however, that “we cannot expect to see spectacular results overnight.” Mexico’s resumed growth will be gradual, he said, adding that the government will continue to support a wage and price control agreement signed with unions and businesses valid through next march.

Mexicans’ initial reaction to news of the agreement was glowing. “The package is excellent,” said Rogelio Ramirez de la O, an economist and private consultant.

“The stock exchange over the next week is going to go through the roof,” he said. “Expectations in Mexico are going to be very positive. This will raise the optimism of the Mexican private sector in the future of the economy.”

He said that the Mexican government’s original assertion that it needed a 50% debt reduction was “just a negotiating position” and that this package is “absolutely enough” to turn around Mexico’s stagnant economy. He predicted positive growth for this year of as much as 3%.

Luis Rubio, director of the private Banking and Finance Institute, a Mexico City-based think tank, said, “That sounds like a superb agreement.” If debt and interest rate reductions are combined with new money, “it looks like an enormous discount, much more than what anyone had been expecting,” he said.

“The main thing here was that Mexican savers and investors believe that the debt will be manageable and the country won’t be in permanent recession,” he said. “This package accomplishes that.”

Besides the actual reduction of a portion of Mexico’s debt, Sunday’s accord has another new element: It assures the Mexican government a continuing flow of new bank loans for the next four years, instead of just 12 more months. The Mexicans had insisted on this feature as a way to ensure stability and help stem the flight of capital.

The package includes these provisions:

-- Commercial banks that have made loans to Mexico in the past will first have the option of providing Mexico with new loans amounting to 25% of the total they have outstanding. They then will seek to reduce Mexico’s debt burden on the rest by exchanging a portion of that debt for 30-year bonds whose interest payments are guaranteed with money from U.S.-issued zero-coupon bonds or money lent by the International Monetary Fund or the World Bank. Some $7 billion already has been assembled for this purpose.

The effect of the securities would be to reduce the portion of Mexico’s debt that they cover by 35%. Banks that choose not to make new loans must discount a larger portion of their existing debt. Details of how much each bank will choose from each option still must be worked out, but U.S. officials estimated that the provision could net Mexico some $10 billion in debt reduction over three years.

Along with the other options to be given commercial banks, Mexico also would offer to trade shares of stock in state-run corporations that it hopes to sell to private investors. These offerings could cover up to $1 billion a year worth of debt. Mexico now owes $107 billion to foreign creditors, some $54 billion of which is owed to commercial banks from the United States, Europe and Japan.

-- The interest rates for any new loans that the banks provide will be 6.25%, well below the 11.3% that prevailed when the current talks began or the 9.1% rates in force this past week. How much Mexico saves under that arrangement will depend upon how much in new loans the commercial banks decide to make, but ballpark estimates suggest that Mexico could save about $1.6 billion a year from the lowered interest rates. The banks also could lower interest on existing loans by trading them for bonds, just as they would under the debt-reduction portion of the program.

-- In addition, both Japan and Spain will provide new loans to Mexico. Japan is expected to offer $2 billion in new lending. Spain’s contribution has not yet been decided.

-- As is traditional in such negotiations, Sunday’s accord was only on the basic outlines of the agreement. Both sides said details would have to be worked out over the next several weeks, and Mexico may not actually realize the benefits of the new accord for two to three months.

In the interim, Mexico will receive some $2 billion in temporary “bridge” loans from other industrial countries, including the United States. How much each country will provide still has not been worked out. The bridge loans will be repaid with money from the new loans that Mexico will receive.

“Finally, the system has an answer,” an ecstatic senior Mexican official said after the talks ended late Sunday. “The important thing here is that this is not just for Mexico, but that it will provide a way to help other countries that are suffering with this burden.”

Times staff writer Marjorie Miller, in Mexico City, contributed to this story.