GAO Says Mexico Got a Subsidy From Bond Sale : Finance: The watchdog agency says the Latin nation got a $192-million break in its debt. The Treasury Department disputes the charge.

WASHINGTON — Congressional investigators Tuesday charged the Treasury Department with giving Mexico a $192-million subsidy by selling it underpriced bonds to help it reduce its foreign debt.

Treasury disputed the General Accounting Office allegation, saying that not only did Mexico not receive a subsidized price but that the bonds actually went for a premium.

David Mulford, Treasury undersecretary for international affairs, said the zero-coupon 30-year bonds were sold at an interest rate of 8.05%, higher than the 7.92% the Treasury was paying at the time to raise funds for the U.S. government.

The bonds were used to partially guarantee debt that Mexico restructured under Treasury Secretary Nicholas F. Brady’s 1989 initiative to help ease developing nations’ debt burden. Mexico restructured about $50 billion in debt to foreign banks, which had the option of reducing principal, reducing interest or providing new loans. The country still has a $95-billion debt.

“Zeros”--as they are commonly called--pay interest and principal in one transaction at maturity and thus are sold at deep discount from face value. The higher the interest rate, the lower the initial cash cost.

According to the GAO, the Treasury had two interest rate options for pricing the zeros: the market for “strips” and the market for 30-year Treasury coupon bonds. The strip market was created by dealers who separate a Treasury bond’s interest payment from its principal payment and sell rights to those payments separately.

Brady chose to base the zeros’ price on the interest rate of the 30-year bond market.

As a result, the Treasury on March 28 sold Mexico $30.2 billion in zero-coupon bonds for $2.99 billion.

The Jan. 5 decision provided Mexico with a $192-million “effective subsidy”--in the form of a lower price for the bonds, the GAO said. The interest rate, based on the market for three days ending Jan. 5, was 7.925%, plus a fee of 0.125%.

If the zeros’ price had been based on the 7.708% yield of the strips market, Treasury would have received $192 million more for the bonds, the GAO charged.

The GAO’s charges may influence negotiations between Venezuela and its bank creditors since the South American country is expected to request Treasury support for a debt-reduction package similar to that obtained by Mexico.

Allan Mendelowitz, a GAO director, told the House Banking Committee that while Brady had the legal authority to provide Mexico with a subsidy, his decision was “neither appropriate nor good public policy.”

“There was no subsidy,” Mendelowitz said.