NEWS ANALYSIS : Rescue Plan Will Cost U.S. and Mexico : Fallout: Zedillo’s prescription for restoring the economy to health is a classic case of good news and bad news.

The new economic plan being forged by Mexican President Ernesto Zedillo may indeed accomplish its long-term goal of re-establishing the Mexican economy on a sound footing--and its shorter-term goal of moving beyond the nation’s immediate crisis of confidence.

But it won’t come without a price tag for the United States or, indeed, for Mexico.

Over time, the cost in this country could be considerable: a smaller Mexican market for U.S. goods, slower growth in the Mexican economy and, as a result, the likelihood of greater illegal immigration from Mexico into the United States. For Mexicans, there is the prospect of higher prices and reduced government services.

In short, it is a classic case of good news and bad news.

Zedillo’s government unveiled highlights of the revitalization plan late Monday night before he was scheduled to address the nation on television. Officials said negotiations with labor unions over wage restraints were continuing.

The plan’s fiscal centerpiece is an $18-billion line of credit from banks around the world.

The immediate cost to the United States is relatively modest: a six-month expansion--to $9 billion--of the $6-billion line of credit activated less than two weeks ago in an attempt to stabilize the value of the peso. The balance will come from an international consortium of central banks, Canada and major commercial banks in the United States, including Morgan Guaranty and Citibank.

Analysts reacted positively to the loan package, significantly more generous than the expected $10 billion to $15 billion. Mexico will have the money available to pay off some $10 billion in tesobonos , or short-term dollar-denominated government bills, that come due over the first quarter of 1995, Brookings Institution economist Nora Lustig said.

Without the loans, Mexico would have faced a short-term cash shortage if tesobono investors had demanded their dollars. Mexico would have had to force investors to accept longer maturities or different securities.

“This is going to allay the fears of insolvency on the part of the Mexican government,” Lustig said.

Zedillo’s plan would also slash government expenditures by enough to turn a budget deficit into a surplus, commit to the privatization of Mexico’s railroads and possibly its ports, and clear the way for still more foreign financial institutions to set up shop in Mexico.

The peso has dropped 35% in value against the dollar since Dec. 19, when the Mexican government began the devaluation of its currency, a response to the depletion of its foreign reserves and a mounting trade deficit.

Despite the hardships, the prospect that Zedillo’s plan will restore confidence in the Mexican economy--at home and abroad--left an impression in official Washington of only slightly restrained optimism. But that optimism was not so great that any officials would attach their names to expressions of support.

The plan is seen as one that will allow Mexico to drive toward economic recovery along a course of reform set out by Zedillo’s predecessor, Carlos Salinas de Gortari, and reinforced by the liberalization of trade established by the North American Free Trade Agreement.

The cost that a harsher economic climate will impose on Mexico’s social fabric is not certain.

The Mexican budget deficit may indeed move into surplus--but by dramatically cutting government expenditures. Wages will be increased, but so will prices, particularly for U.S. goods that will become more expensive as the value of the peso shrinks in relation to the dollar.

In any case, even with wage increases under negotiation, there will be a decrease in “real wages,” based on the buying power of the peso within the Mexican marketplace.

And interest rates will go up to attract foreign capital, while the rate of growth in the Mexican economy, which some had earlier predicted would reach 4% in 1995, will fall back--and possibly even turn negative.

Still, the foreign aid package is seen as a huge hurdle crossed. Mexico needs the loans because its foreign reserves have been severely depleted by a mounting trade imbalance, its costly support of the peso and by accelerated capital flight. Mexican capital reserves now stand at less than $6 billion, down from $28 billion early last year, said Lawrence Goodman, economist with Salomon Bros. in New York.

Zedillo’s package is also aimed at containing Mexico’s dreaded inflation at 15% to 20%, up from about 8% in 1994.

Controlling inflation will be predicated upon the wage and price agreements Zedillo’s government negotiates with labor unions and business leaders and whether he can make them stick, Goodman said. The preliminary indications that labor will accept a wage increase of 4% and a tax cut of 3% are “extremely positive signs,” he said.