A Deal on Mexico’s Debt

The agreement for easing Mexico’s debt crisis with commercial banks is promising, although only time will measure just how promising. At best, the plan could revive a reformed Mexican economy and underwrite four years of substantial expansion. At worst, the plan could compound the already massive indebtedness while it eases the short-term pain.

President Carlos Salinas de Gortari has been enthusiastic, although he also has cautioned the people of Mexico that this is neither a cure of the considerable ills of the Mexican economy nor a guarantee of prosperity. Despite his words of caution, there is a risk of excessive expectations and of misunderstanding the relatively limited relief that is being proposed. If nothing else, however, the agreement serves to communicate the extraordinary confidence that Mexico’s president has generated in the world through his economic reforms and political skills. Commercial bankers, the U.S. Treasury, the World Bank, the International Monetary Fund and other contributors to the rescue plan are clearly eager to have other debtor nations observe and emulate the Mexican example.

Commercial banks are owed half of Mexico’s $107 billion in debts. Under the agreement, they have four options for sorting out their share of the indebtedness. They can forgive 35% of what is owed and take the balance in long-term bonds, supported, but not guaranteed, by international lenders, including the U.S. Treasury, World Bank and IMF. They can discount the debts and take equity in Mexican enterprises in exchange for the balance. They can discount the present interest rates to 6.25%. And they can offer new loans, geared to a minimum of 25% of their outstanding debt.

How much this helps Mexico will depend on how the banks exercise the options. The best estimate at the U.S. Treasury is that the overall debt will be reduced by at least $12 billion over the next four years, while there will be a reduction in debt service of about $1.5 billion a year. Those savings, if supplemented by a surge of new loans and new investment, could result in growth this year alone of as much as 3%. And if growth builds on itself,the rebound of the economy could then facilitate a long-term resolution of the crisis altogether.

For U.S. Treasury Secretary Nicholas F. Brady, author of the global debt plan, the question now is whether this approach can be applied to other crisis nations, understanding that almost all of the others pose even more complicated problems.

For President Salinas, the question now is translating this opportunity into hard political decisions that will reinforce the reforms under way, assuring a permanent transformation. There is no easy way to generate a prosperity that reaches those who have not yet shared Mexico’s considerable growth and development.