Giving Credit to a Friend : Proposed U.S. loan guarantees seem to be easing Mexico’s peso crisis

The proposed U.S. loan guarantees to Mexico appear to have calmed financial markets for now. The vow from President Clinton and congressional leaders of both parties on Thursday “to do what is necessary to restore financial confidence in Mexico” was a wise and needed boost, in the interest of both Mexico and the United States. The action helped shore up the battered Mexican peso.

Washington worked quickly to put together the proposal, for at least $25 billion and up to $40 billion in loan guarantees. That would enable Mexico to borrow from commercial banks at more reasonable rates to pay off debt obligations. The proposal is subject to congressional approval. To clear that hurdle, Treasury Secretary Robert E. Rubin, Federal Reserve Board Chairman Alan Greenspan and aides of Mexican President Ernesto Zedillo crafted a plan that reduces U.S. exposure in the highly unlikely event that Mexico defaults on its international loans.

A loan guarantee is not a gift. However, U.S. law requires the Treasury to set aside money to cover the possibility of default--an amount that could cause a charge to the budget. To avoid this, Mexico’s central bank would pay the “set-aside” amount as a fee to the United States. (The Bush Administration used a similar arrangement in a $10-billion loan guarantee program for Israel in 1992.) Mexico may also throw in oil revenue as collateral.

Despite starting an austerity program, President Zedillo and his new trade minister, Guillermo Ortiz, could not stop the peso’s free fall, triggered by an unexpected devaluation. The U.S. support for the Mexican economy is not only important to world financial markets but to Mexico’s own internal stability.