After nearly a year of negotiations, President Carlos Salinas de Gortari of Mexico and international bankers signed a landmark agreement Sunday to reduce Mexico's crushing foreign debt by about $7 billion.
The accord marks the first time that a Third World country has negotiated a reduction of its foreign debt, and the first success for the so-called Brady plan, the controversial Third World debt strategy that U.S. Treasury Secretary Nicholas F. Brady outlined last March.
Brady and a bevy of U.S. officials were on hand for the signing ceremony on the patio of Mexico's colonial National Palace. Salinas said the agreement is "sufficient" to put Mexico's debt problems behind him, and Brady touted it as a watershed.
"A new dawn is rising. Mexico stands as a beacon of hope for other debtor nations," Brady said.
The Brady plan, announced last year, offers debt forgiveness in exchange for economic reforms in developing countries. Previously, banks managed debt problems mainly by lending countries money to make interest payments on their old loans. This increased the debt burden.
But even as the U.S. and Mexican officials hailed the signing as evidence that the Brady plan is the only effective strategy in dealing with the global debt problem, some analysts argued that it has failed and should be replaced.
Critics charge that the plan may have made the debt situation worse instead of better by providing a loophole through which large commercial banks can escape obligations for making more loans to Latin American countries.
And they say few other countries are likely to make the radical and politically painful economic changes that qualified Mexico for debt reduction. Venezuela is a possible candidate, but Brazil and Argentina--two of the biggest debtor nations--are not.
President Bush still publicly supports the Brady plan, but U.S. officials privately admit that a high-level interagency working group has begun to explore alternatives.
"What has been accomplished in a year is only a bare minimum," said Alan J. Stoga, an international debt analyst for Kissinger Associates, a New York consulting firm.
Before the agreement, Mexico's total debt burden was about $97.3 billion, second in Latin America only to Brazil. The accord completed in December and signed Sunday applied only to the $48.5 billion in public debt held by about 450 commercial banks.
The deal provided three options to the banks: a reduction in principle, cuts in interest rates or new loans. The renegotiated loans will be backed by the World Bank, the International Monetary Fund and the U.S. and Japanese governments.
The Mexican government had hoped that at least 20% of its debt would be matched by new loans, but the final deal fell short of that goal. Mexico will receive only about $6 billion in fresh funds, government officials conceded. They said about $20 billion of the debt will be restructured at a 35% discount and about $22 billion will be subject to a lower interest rate.
Salinas asserted that in "economic terms," the agreement--including the foreign investment and capital it has attracted back into the country--has reduced the nation's total debt burden by the equivalent of $20 billion since he took office on Dec. 1, 1988.
He said Mexico's foreign debt represents 40% of the gross national product now, contrasted with 57% at the start of his term.
"We consider the chapter of the historic debt negotiations with the international commercial banks closed today," Salinas said.
But other analysts say Mexico has little to show for the deal in immediate direct benefits. After all is totaled, Mexico will cut its annual debt-service costs by $1.5 billion a year at best--about one-third of its previous payments to the banks. And the $1.2 billion per year that it will receive from new loans over the next three years will not be enough to meet its cash-flow needs.
Critics say the Mexican agreement reflects the main problem with the Brady plan: It has failed to provide debtor countries with the most important ingredient they need to help put their economic houses in order--enough cash to finance the adjustments they must make.
To qualify for debt reduction, Mexico had to make huge cuts in government spending--including layoffs--open its borders to foreign investment and imports, sell off most of its state-run enterprises and freeze many prices and wages to slow inflation. Such changes require extra resources to cope with the rise in unemployment and social discontent.
Mexico was in a better position than most Latin American countries to face these difficulties because its Institutional Revolutionary Party, with affiliated labor unions and peasant organizations, has ruled the country for 60 years. But even this vast party machine faced serious challenges over the unpopular economic policies and came close to losing the 1988 presidential election.
Given the three options under the Brady plan, commercial banks have generally taken the government-guaranteed bonds rather than pump new money into the debtor nations. As a result, critics say the Brady plan has effectively put an end to the relatively scant amount of new lending that commercial banks were doing in Third World countries.
Also, debt reduction may turn out to work better in theory than practice. Reducing a country's debt by $1 saves it only 10 cents a year in lower interest costs if interest rates are 10%, while providing it with new loans gives it 90 cents out of each dollar to spend.
Miller reported from Mexico and Pine reported from Washington.