Mexico Counts on Image, Not Reality, of Debt Rescue

Mexico’s new financing package, which the nation’s authorities are hailing as a solution to the country’s debt problem, does not meet the goals that President Carlos Salinas de Gortari laid down when he took office. Even worse, it falls far short of Mexico’s needs. Instead of bringing lasting, substantial relief to an economy that has been stagnant for eight years and has paid out more than $80 billion in debt service, it simply postpones a final reckoning.

As was the case in 1982, and again in 1986, this new “rescue” is just that: a two- or three-year stop-gap measure that is not likely to create growth and certainly will not free Mexico from having to return to the negotiating table. It does not put an end to the suffering of the Mexican people, nor will it contain their growing discontent.

The agreement establishes three options for creditor banks: a 35% reduction of the principal; or a 35% reduction of interest through a lower fixed rate; or new loans over the next four years equivalent to 25% of a bank’s present exposure.

The deal requires Mexico to purchase approximately $3 billion in U.S. Treasury zero-coupon bonds as collateral. Although these bonds will be paid for through new loans extended by the World Bank, the government of Japan and the International Monetary Fund, their cost must be discounted from the total value of the deal. And it should be noted that the agreement applies only to the $53 billion that Mexico owes 500-odd commercial banks; it excludes the $47 billion owed to multilateral institutions.

While the exact savings will not be known until most of Mexico’s creditors pick their option, an estimate is already possible. If every bank were to pick option A (principal reduction), the decrease in Mexico’s debt would amount to $18 billion. Yearly debt payments would be reduced by about $1.8 billion. After discounting the cost of collateral and the new loans that Mexico has contracted from other institutions since the beginning of the year (altogether, about $7 billion), net reduction in external liabilities would be about $11 billion--11% of the nation’s present $100-billion foreign debt. The yearly saving would be $1.3 billion to $1.5 billion, roughly 10% of present debt service. These figures are far from negligible, but they are even further from constituting significant debt relief.

Option B (interest reduction) would represent a similar savings if every bank were to choose it while leaving the outstanding debt intact. Option C (new loans), while the least attractive in political terms because it implies piling new debt on old, is the most generous. It would bring Mexico nearly $3 billion dollars a year if all the major creditors were to select it.

Eighty percent of Mexico’s creditors, including most of the largest ones, are expected to choose options A and B (particularly the latter), reducing yearly debt service by about $1.5 billion and the outstanding debt by about $5 billion. The remaining creditors would provide fresh money of less than $1 billion per year through 1992. Total value of the deal: between $2.2 billion and $2.5 billion yearly. This is much less than the $4.5 billion per year Mexico had originally asked for. It is nowhere near the amount required to make the economy expand at a rate to make up for the “lost” decade and keep up with population growth. The net debt reduction would be virtually nil in relation to present liabilities.

The Mexican government has implicitly acknowledged that the financing package’s resources are woefully inadequate. It has shifted emphasis from the deal’s details to its psychological impact. The country’s authorities hope that by creating a sense of confidence, optimism and security about the short-term economic future, they can persuade foreign investors and holders of Mexican assets abroad to make up the difference between the debt deal and the nation’s needs. While not impossible, this scenario is also problematic. Foreign investment for the first quarter of this year was down 58% in relation to 1988. The prospect of quickly closing that gap, much less overtaking it, is discouraging.

Given the authorities’ control of most of the Mexican news media, the hoopla and hype skillfully orchestrated by the government around the agreement will doubtless generate support among broad sectors of Mexico’s middle classes. Unfortunately, they have little money to spare and invest. That leaves it to foreign investors and wealthy Mexicans with money abroad: Will they make their decisions on the basis of speeches and impressions, or in the light of the actual numbers and details of the new package?

By refusing to use suspension of payments as a negotiating weapon, and by excluding nearly half of its debt from reduction mechanisms, Mexico painted itself into a corner. It probably signed the best agreement possible within the context it imposed on itself, but an inadequate agreement in relation to its needs. The debt crisis and its consequences are far from over.