If It Won’t Work in Mexico . . .

Construction of a debt-relief package for Mexico has become a critical test of the Brady Plan to ease the debt crisis of the developing nations. The plan, already moving slower than expected, could collapse in the weeks ahead because of a disappointing response to the rescue package for Mexico. There is widespread agreement that the plan can work nowhere if it can’t work in Mexico. The fate of the Mexican package now depends on the willingness of the commercial banks to play the part most people thought they had long since agreed to play.

External debt of the poor nations grew in 1989 to a record $1.165 trillion. There was a modest shift from debilitating short-term to relatively healthier long-term debt as the international rescue effort began to take effect. That led Stanley Fischer, World Bank chief economist, to say that there has been “substantial progress in advancing the debt strategy, but the future will require continued efforts on the part of the debtor countries, their private creditors, and official lenders and donors to advance and develop the strategy.”

His wisdom is now being tested in dealing with Mexico’s debt of more than $100 billion, second largest in the Third World. Unfortunately, the response of private creditors with debt relief and new capital has fallen short of expectations, leaving a gap of at least $500 million in the basic rescue plan. U.S. Treasury officials are now trying to fill the gap with a controversial bond issue to be sold to Mexico at a discount that critics suggest would represent a significant subsidy by U.S. taxpayers.

We support a major U.S. governmental role in resolving the debt crisis, but we think the funding should be direct and open, not through subsidized bond sales. From the moment Treasury Secretary Nicholas Brady proposed the plan more than a year ago, there has been agreement that taxpayers should not be bailing out commercial bankers.

Resolution of the debt crisis has a double importance. It is essential in the short term to reverse the declining economic condition of the debt-impacted developing nations. It is essential in the long term to global prosperity, the economic viability of rich and poor alike, not least the economic well-being of the United States. That is why it is a priority for the American government. And why it should also be for prudent bankers.