NEWS ANALYSIS : Experts Predict Grim Future if No Mexico Aid : Economy: That country, and Latin America and the U.S. too, could be hurt if Congress rejects $40 billion in loan guarantees.

As prospects for a U.S. aid package for Mexico’s economy have grown increasingly uncertain in Congress, U.S. investors and Mexican leaders find themselves entertaining some grim scenarios.

Economists and trade experts say a refusal by Congress to approve President Clinton’s $40 billion in loan guarantees would deliver a devastating economic blow to Mexico--and have severe repercussions on this side of the border and throughout Latin America as well.

For Mexico, post-devaluation hard times would become harder. Rejection of the package would probably lead to investor panic, with foreign capital rushing for the doors. The peso would lose more value, and Mexico would see higher inflation, unemployment and social unrest in 1995, said Gary Hufbauer, senior fellow at the Institute for International Economics in Washington, D.C.

Some say Mexico might even have to freeze dollar deposits and impose tough currency exchange controls the way it did after the 1982 devaluation in order to keep funds from leaving the country.

Those measures would scare off foreign investors for years to come and send a final message that Mexico’s economic reforms over the past decade were for naught, that Mexico’s efforts to rise above its history of economic instability and mismanagement have largely failed.

“If they’re forced to put on capital controls, nobody will trust them, and you would be talking about a long-term, not a short-term, recovery for Mexico,” said Sidney Weintraub, an economist at the Center for Strategic and International Studies in Washington.

Senate Majority Leader Bob Dole (R-Kan.) said Sunday that Congress would reject the loan guarantees if they were put to an immediate vote, and he warned that Clinton will have to call off Democratic attacks on House Speaker Newt Gingrich (R-Ga.) if the White House hopes to advance the package.

Speaking on the CBS program “Face the Nation,” Dole said he continues to favor support for Mexico so long as the package includes conditions that minimize the risks for U.S. taxpayers.

On NBC’s “Meet the Press,” meanwhile, Sen. Christopher Dodd of Connecticut, chairman of the Democratic National Committee, called it the “height of irresponsibility” to link Mexican aid to Gingrich’s treatment.

If Congress and the White House cannot come to terms on a rescue plan, U.S. investors holding Mexican stocks and bonds would lose even more than they have already, Hufbauer said. Over time, the United States would see increased illegal immigration while U.S. trade with Mexico--which was accelerating rapidly under the North American Free Trade Agreement before the December devaluations hit--would fall off.

A rejection would also have hemispherical political repercussions for the United States, as a failed litmus test of the nation’s ability to lead the new North American economic order that it helped fashion. In early December, that order seemed secure when Clinton--aglow from the passage of the General Agreement on Tariffs and Trade, the worldwide trade accord--met other Latin American leaders at the Summit of the Americas in Miami. But Congress’ failure to act to help Mexico in its hour of need would weaken those foundations, said Hufbauer, a Mexico specialist.

“It’s a decisive vote by the Congress on the U.S role in the world,” Hufbauer said. “Failing to pass it would be the financial equivalent to nuclear war. U.S.-Mexico relations would be sour for years to come. People will wonder about our ability to respond to crises of our neighbor next door, much less worldwide.” Others are not so apocalyptical but nonetheless say they see the fate of the rescue package as crucial because Mexico has so few options. And although many understand Congress’ concern over Mexico’s ability to repay U.S.-guaranteed loans, they decry the conditions some want to attach to the package as an affront to a neighbor who for the past six years has done everything that the United States has asked in terms of economic policy.

“Mexico is right now under siege, and the loan guarantees are a low-risk proposition,” said Nora Lustig, senior fellow for policy studies at the Brookings Institution. “So from the outside, it looks like Congress is treating Mexico like a defeated enemy rather than neighbor and a partner.”

The $40 billion in loan guarantees is designed to alleviate Mexico’s liquidity crisis, or shortage of cash. In simple terms, Mexico has $28 billion in dollar-denominated obligations coming due over the next year and less than $6 billion in reserves on hand to pay them.

The loan guarantees would enable the Mexican government to go out and borrow the money at favorable rates to repay the obligations, called tesobonos , and to roll the investors over into longer-term investments, keeping the much-needed dollars inside the financial system. The assumptions are that the guarantees would give Mexico’s economy time to catch its breath, stabilize and regain investors’ confidence.

Without such guarantees, backers of the package say, Mexico--its negative trade balance expected to hit $26 billion this year--will be unable to generate dollars through trade over the foreseeable future. It is hoped that the devaluation, which has clipped 40% off the peso’s value, will eventually reverse the deficit by making Mexican products more attractive to foreign consumers.

In the absence of guarantees, the Mexican government would probably have to declare the peso “non-convertible to dollars, (acknowledging) that it couldn’t comply with all its obligations,” Lustig said. Mexico would then, as it did in 1982, refuse to exchange pesos for dollars, forcing dollar-denominated investors to accept substitute securities, she added.

Similar controls in 1982 caused financial disaster for thousands of U.S. expatriates, including retirees who invested in dollar savings accounts after the Mexican government dangled interest rates of 35% and higher.

Times wire services contributed to this report.