U.S. Signs Pact for Mexico Loan Aid : Economy: Washington will provide $20 billion in guarantees in return for a tough austerity program. Clinton stresses importance of neighbor to U.S. interests.

The United States will provide $20 billion in loan guarantees for the Mexican economy in exchange for Mexico’s pledge to impose a drastic austerity program of higher interest rates, reduced government spending and the sale of some government-run businesses to private interests, the two countries agreed Tuesday.

“Mexico is taking some very courageous steps--difficult steps for them,” President Clinton said. “The United States has great interests there . . . many jobs tied up in it, our whole strategy of promoting democracy and free markets throughout Latin America.”

Pledging austerity for his country, Mexican Finance Minister Guillermo Ortiz agreed that the financial rescue “will only work . . . if Mexicans put all their efforts to overcome this very difficult situation.”

Under the agreement, the United States will act as a guarantor of loans to Mexico to reassure nervous international financial markets. Concern over Mexico’s economic health has threatened to “spill over into other emerging” nations, jeopardizing their ability to borrow and grow, Treasury Secretary Robert E. Rubin said.

The U.S. contribution of $20 billion is the core of an approximately $50-billion international package to restore lenders’ faith in Mexico. The money will be used to pay off some short-term debt now and to issue long-term bonds that will mature in up to 10 years.

Suffering from the plunging value of the peso since December and from widespread fears about the nation’s solvency, Mexico has been taking strong measures to slow its economy and boost its image as a prudent borrower. As a first step that will sharply slow the economy, the government boosted short-term interest rates 10 percentage points Monday. Rates were in the stratospheric 50% range Tuesday.

These interest rates will make government debt attractive and boost the peso in currency markets. But they strike a devastating blow at businesses seeking to borrow money and will quickly slow the Mexican economy. The rates also seem certain to stimulate increased immigration to the United States.

Devaluation of the peso, which makes imports much more costly for Mexico’s consumers, means that “Mexicans have taken about a 40% hit to the quality of their life,” said John J. Miller, vice president of the Center for Equal Opportunity, a think tank here that deals with ethnic and immigration issues. “It makes the United States a much more attractive place for some people to come to earn money to send back home,” he said.

Rubin said the Mexican government needed a “great deal of courage” to commit “to the kind of stringent economic medicine this program requires.”

In the Treasury’s ornate marble and brass cash room, Rubin and Ortiz, seated at a table in front of 16 U.S. and Mexican flags, signed copies of the four complex agreements concluded after nearly a week of negotiations. In the documents, Mexico promises to:

* Provide collateral with money from the sale of crude oil and petroleum products, a source of $7 billion a year in revenues. Mexico’s customers will funnel their money through a bank account under the control of the U.S. Federal Reserve Bank of New York. If Mexico defaults on its loans, the United States could seize the funds.

* Keep a tight limit on overall credit growth this year, restraining net domestic expansion to 10 billion pesos.

* Have a government surplus of just 0.5% of gross domestic product, to provide reassurances that it is serious about demonstrating fiscal prudence.

* Raise $12 billion to $14 billion from the sale of government-owned businesses and concessions.

* Issue new economic publications with “timely and accurate data” to reassure investors that the country is providing a clear view of its economic circumstances.

* Maintain “tight monetary conditions” to assure that interest rates exceed the rate of inflation.

* Protect bank depositors, much as U.S. depositors are protected by federal insurance, to restore Mexicans’ confidence in financial institutions hard-hit by the peso devaluation and rising interest rates.

* Accelerate structural reforms in banking, telecommunications and transportation.

Clinton hopes that the collateral arrangement will satisfy congressional critics and others skeptical of aid to Mexico.

The President had ordered such a rescue package devised using funds under his control after it became apparent that a larger aid program requiring congressional approval would not win speedy passage because many lawmakers objected.

At public and private briefings Tuesday, U.S. and Mexican officials emphasized repeatedly the hard choices Mexico had accepted. The country reaffirmed “its commitment to strong economic policies which are necessary to overcome the current financial crisis and support . . . a renewed process of sustainable economic growth for our country,” Ortiz said.

Mexican markets reacted strongly Tuesday to the stiff conditions in the program. The peso fell 23 centavos to 5.63 to the dollar, while the Mexican Stock Market Index plummeted 4.92%--86.95 points--to 1,679.19, its lowest level since July, 1993.

The agreement is likely to have political fallout in Mexico, both because oil exports are to be used to guarantee payment and because of persistent rumors of secret political conditions. Everything from the government crackdown earlier this month on rebels in the southern state of Chiapas to the clean gubernatorial elections won by an opposition political party in the western state of Jalisco has been attributed to the debt deal.

“The agreements signed between Mexico and the United States are financial in nature and contain no kind of political conditionality,” the Finance Ministry said in a statement issued in Mexico City.

Still, analysts warned that pundits are likely to blame the debt deal for any unpopular decision that the Mexican government makes over the coming weeks.

The $20 billion from the United States, which comes from currency stabilization funds controlled by the President, can be used by Mexico to borrow dollars for 90-day loans or for longer-term loans of as much as five years. The United States also will guarantee securities issued by the Mexican government.

Other support for Mexico will come from the International Monetary Fund, with $17.8 billion, and the Bank for International Settlements, another multinational institution.

Despite appeals from the United States, other nations failed to make significant contributions to the aid program. Rubin said that “little or no short-term monies will be forthcoming” from sources other than the United States.

Rosenblatt reported from Washington and Darling from Mexico City.

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Help for a Neighbor

Highlights of a $20-billion rescue package signed Tuesday by the United States and Mexico:

AT A GLANCE

* Aid: $3 billion in U.S. loans and loan guarantees for Mexico will be made available now and another $7 billion over the next four months. Beginning in July, the second $10 billion will be provided in stages.

* The Plan: The funds will let Mexico pay off immediate government debts. They also are intended to shore up Mexican banks, easing the pressure on them.

* Collateral: Mexico’s state-run oil company will instruct its foreign customers to pay for Mexican oil by depositing funds in a U.S. bank. The bank will transfer the money to a special account at the Federal Reserve Bank of New York. Mexico will have access to the account, unless it defaults on the U.S. loans.

* In Return: Mexico pledged to make fundamental reforms of its economy, steps that include painful increases in interest rates.