Nickeled-and-Dimed Deeper Into Debt : Mexico: The U.S.-crafted deal on debt relief doesn’t come close to giving the Salinas government what it needs to avert a political and economic crisis.

The signing of the final agreement between Mexico and its international creditors last week is little more than yet another pause in Mexico’s decade-long recession crisis.

The agreement is clearly a major short-term political victory for Presidents George Bush and Carlos Salinas de Gortari; their 1988 campaign promises for a new debt initiative have been temporarily fulfilled. For the banks, the agreement represents the success of a strategy they designed in 1988 and lobbied so successfully that by March, 1989, Treasury Secretary Nicholas F. Brady would unveil the plan as his own.

For Mexico, however, the so-called Brady plan offers very little of substance for the country’s uncertain political and economic state.

Yet we are now assured by the Bush and Salinas teams that Mexico’s economy will experience some stimulus from this agreement, that new loans are still possible, that capital repatriation will continue, and that the domestic economy will continue to stabilize under current policies.

The truth of the matter is that Mexico’s level of external debt will actually increase. The agreement’s reduction of debt service by approximately $2 billion a year will still leave Mexico paying almost $12 billion in debt service, which is equal to about 45% of export earnings. Mexico still will not have the financial resources to generate sustained and dynamic economic growth and investment.

Salinas began his conversation with the bankers last April by asking for a level of new money and debt-service reduction amounting to $42 billion, or $7 billion per year of his term in office. Theoretically, this would have allowed the economy to grow at a rate of 6% a year. What is sad is that Salinas backed away from his early demands, to the point that by the end of July and early August it was clear for all to see that he had lost and the bankers had won.

What never occurred in the process of devising the Brady plan was the asking and answering of one simple question: What is the level of debt service that Mexico can sustain while generating an economic growth rate of 6% a year for six years? Answering this question would have led to a debt-service agreement structured to Mexico’s capability to pay while it moves toward long-term goals of solvency. Instead, the bankers’ goals were served; they discounted about half of the $45-billion debt that was subject to renegotiation, and gave a lower interest rate to the rest. Mexico came away with a scant $6 billion--only $1.2 billion a year--in new money. Its external debt remains a national economic crisis, and with further austerity imposed by the Brady plan, a political crisis looms as well.

The political profits will be quickly absorbed. The Brady plan is no match for the lengthening line of debtors hoping to test it for themselves. The International Monetary Fund/World Bank will eventually realize that its participation in the loan guarantees was a mistake. The Brady plan will have minimal impact on developing countries’ economic stagnation, which is rooted in the structural indebtedness, which remains intact.

The problem of Third World debt still needs a genuine solution. Maybe the coming economic slowdown and escalating political instability in debtor countries, along with the rapid recognition that the Brady plan is indeed useless, will move us toward a more serious and genuine comprehensive debt-relief effort. As most debt experts will acknowledge, there is no shortage of excellent strategies and policies for such an endeavor. But there are two missing ingredients: the political will and a recognition that there is no realistic alternative to the commercial banks having to write off, without guarantees, a much larger portion of the debt.