The Paradox of the Mexican Bailout

The paradox of the U.S. bailout of Mexico is the same whether viewed from north or south of the border. President Clinton faced a politically dicey situation unless he put tough conditions on Mexico before committing the U.S. share of international loan guarantees. His Mexican counterpart, President Ernesto Zedillo, similarly took a big political gamble in agreeing to a U.S. package of austerity measures. Accommodating the conflicting pressures is crucial to restoring Mexican fiscal and financial stability and protecting U.S. interests there. From the very beginning, damage control concerning the peso’s free fall has been rife with political as well as economic implications. There was--and still is--lots of finger-pointing over who was at fault in Mexico for the abrupt devaluation of the peso in December. Congress lamely ducked the politically unpalatable task of approving loan guarantees for Mexico. So the Clinton Administration had to come up with an international plan that allows the United States and the International Monetary Fund to guarantee billions in private bank loans. The Mexican stock market and peso roil with each uncertainty.

On Tuesday U.S. Treasury Secretary Robert E. Rubin and Mexican Finance Minister Guillermo Ortiz announced an agreement on the conditions for the $20-billion U.S. line of credit to Mexico. As part of the deal, the Administration insists on a tighter money supply, which contributed to the Mexican central bank’s politically risky increase in short-term interest rates--to an astonishing 49.5%--on Monday. Another part of the agreement calls for Mexican oil export revenues, pledged as collateral, to go directly into an escrow account at the Federal Reserve in New York so that U.S. access to the money is assured.

In the short run, abiding by these conditions will jar the Mexican economy and consumers who already face 60% interest rates for auto loans. And the escrow account may raise the volatile question in Mexico of sovereignty over its oil, even though Mexico will maintain control over whom it sells to, pricing and the collection of all domestic receipts.

The fundamentals of the Mexican economy warrant U.S. support. However, the delay in finalizing the loan guarantees has been almost as destabilizing as the peso’s sudden devaluation. The crisis of confidence must be contained before it spreads to other emerging economies.