Mexico Uses $4 Billion From U.S. Bailout to Pay Investors


Three weeks after it started receiving one of the biggest and most controversial credit packages in U.S. history, the Mexican government has spent a fifth of the $20 billion in promised U.S. loans to pay off American insurance companies, mutual fund investors, Wall Street brokerage houses, Mexican banks and the richest of Mexico’s rich.

Documents obtained from Mexico’s treasury department and U.S. officials confirm that Mexico has spent slightly more than $4 billion of the funds to cover high-risk government bonds. The United States sent two installments totaling $5.2 billion to Mexican government accounts at the Federal Reserve Bank in New York, the latest on March 15.

Much of the money never left New York, where it was used to redeem the high-profit bonds, held primarily by major U.S. institutions, Wall Street speculators and wealthy Mexicans who bought the securities largely through non-taxable offshore corporations, according to investment sources and market analysts.

The expenditure--a permissible use of the money--is expected to fuel criticism by the small but vocal group of U.S. lawmakers who have blasted the credit package as a bailout for the rich.


But officials in both countries say the bond redemptions are designed to save Mexico from the economic catastrophe of default by showing that the government can make good on its debts.

If the U.S. money had not been used to pay off the bonds, known as tesobonos, Mexico almost certainly would have defaulted, the officials argue.

“And if Mexico has to default on its tesobonos,” one official said, “it means they can’t trade in the international market, and the whole economy melts down.”



Still, officials who defended the buybacks concede that the $20 billion--even when combined with $28 billion in additional international loans--will be nowhere near enough to cover all of Mexico’s investment debts as they come due this year.

Mexico plans to use the $1.2 billion that remains from the first installments during coming weeks to pay off additional bonds--also held by U.S. institutions, speculators and wealthy Mexicans--said officials in Washington and Mexico City.

Although it remains uncertain this week whether the massive bond redemptions will achieve the Clinton Administration’s stated goal of helping to defuse one of Mexico’s worst economic crises in modern history, the use of the loans appeared consistent with the terms the U.S. Treasury attached to the credit package.

The bailout allows Mexico to spend the money “to redeem short-term, dollar-denominated debt of the United Mexican States and its agencies.”


The terms include a rare accounting practice that requires every Mexican drawdown to be approved in advance by the U.S. Treasury--and the Mexican government to account for each dollar as it spends the money. Mexico has disclosed in documents sent to the U.S. Treasury Department that the funds went to cover bonds either coming due or offered for sale in secondary markets during the last three weeks.

But it would be illegal--and impossible--for U.S. and Mexican authorities to comply with a major demand of opponents of the aid package in the U.S. Congress: that the identities of the people and corporations bailed out by the recent bond buybacks be disclosed.

“It’s not knowable,” said one U.S. official, stressing that tesobonos are bearer bonds untraceable to individual holders. Even if the Mexican and U.S. treasury departments could learn the identities of the bondholders paid off in the last three weeks, to reveal them publicly or even confidentially to Congress would violate banking-secrecy laws in both countries, according to officials. On both sides of the border, the congressional demand is viewed as a dangerous tactic to subvert the loan package.

Instead, Mexican authorities confirmed, they are attempting to list the $4 billion worth of securities they have bought back so far, which will provide little more than the number of tesobonos redeemed.


Documents obtained by The Times show that as much as 90% of the $4 billion went into bank accounts of U.S. investors and Mexicans living abroad--who stood to lose those billions of dollars if Mexico defaulted--a bitter likelihood without the $20-billion credit package, U.S. officials said. The buyback strategy, analysts asserted, could be almost as risky as the initial tesobono investments proved to be, because even with the U.S. aid, default remains a possibility, although a greatly diminished one.

Officials in both countries have insisted during the continuing debate on Capitol Hill that the bond buybacks were the best use of the initial money. It was only coincidental, they said, that the tesobono purchases covered potential losses for institutions and individuals who were well aware of the risks when they bought the bonds before Mexico’s economy began to unravel.


The hope on both sides of the border is that the bond buybacks will help stabilize Mexico’s turbulent financial markets, ultimately motivating foreign investors to return.


Investors swept billions from the country when President Ernesto Zedillo’s new government took steps last December that devalued the peso by more than 40% in a matter of weeks.

The devaluation detonated Mexico’s financial bomb and left Zedillo’s government with insufficient funds to cover tens of billions of dollars in short-term debt, threatening a default that could spread panic through other markets worldwide.

Mexican treasury documents indicate that the Mexican government has spent a total of $13,037,500,000 since Jan. 1 to cover the dollar-backed tesobonos--most of it from the United States, the International Monetary Fund and the Swiss-based International Bank of Settlements and credited to investor accounts in the United States.

Mexico has already spent nearly half of the IMF loan that will total nearly $18 billion; much of the IMF’s initial $7-billion advance to Mexico was used to redeem tesobonos, the treasury records show.


Speaking to reporters at an international economic seminar in Jerusalem on Monday, Mexico’s finance secretary, Guillermo Ortiz, said the buybacks have helped stabilize Mexico’s financial markets during the last 10 days.

On Tuesday, he vowed for the second straight day that the government will cover all bonds and debts still outstanding.

As of the end of March, however, Mexico still owed $16.1 billion on tesobonos that will come due in the future, in addition to $100 billion in other outstanding dollar- and peso-denominated bonds and other government securities.



Moreover, U.S. and Mexican officials said some of the next parcel of U.S. loan money--$4.8 billion scheduled to start in June--will be needed to bail out the Mexican banking system, as well as to continue redeeming tesobonos as they come due. The loans to be channeled to Mexico’s shaky banking sector, those officials argued, are essential to prevent panic in the recently privatized banks by supplying them with enough dollars to meet their own ballooning debt.

The final $10 billion of the U.S. credit package will stay in accounts at the U.S. Federal Reserve Bank in New York as an emergency fund that the Mexican government can tap later this year to meet “whatever contingency may arise,” according to the officials and the documents. Both indicated that those borrowings will also have to be accounted for in detail as the Mexican government spends them.

Most officials and independent analysts said it is too early to tell whether Ortiz was correct in his assessment that the bond buybacks have begun to restore enough investor confidence to stabilize Mexico’s financial markets.

Zedillo is expected to make exactly that case today when he speaks to the American Society of Newspaper Editors in Dallas.


Addressing stockbrokers in the Mexican capital on Tuesday, Zedillo said the aid package, combined with his economic austerity plan, was beginning to show positive results.

“We have acted with firm decision and swiftness to avoid an even greater financial crisis,” he told the brokers at their sixth annual convention.

“The first signs of this strategy are beginning to stand out,” he said. “Certainly, the adjustment has been very severe. The crisis has had a significant cost in limiting economic activity, income and jobs. However, the extent to which the economy has rapidly adjusted also has made us hopeful for a very quick and fundamental recovery.”

Mexican markets did level off during last week’s trading, albeit at crisis levels.


The government also succeeded in selling all the securities it offered at each of its weekly auctions during the last month, although it deliberately limited the number of bonds and treasury bills it issued in an ongoing effort to transform its debt from short-term to longer-term. But the government also began taking steps during the last week to hold the line on the nation’s soaring interest rates, a move that several analysts said will dampen investor interest.

The use of the U.S. loans to redeem tesobonos has had a significant negative effect: It has increased the criticism of the Clinton Administration’s bailout among those who opposed it here and in the U.S. Congress.


Although there is little risk that congressional dissent will affect future disbursements, which President Clinton unilaterally approved on Feb. 21 by using the U.S. Treasury’s Exchange Stabilization Fund, Sen. Alfonse M. D’Amato (R-N.Y.) has continued to hammer away at the loan agreement.


Last week and again this week, he led conservative forces in the Senate behind an amendment that would limit the U.S. loans to the $5.2 billion already transferred into Mexico’s accounts. At the heart of D’Amato’s argument is the premise that the loans are being used to bail out the rich while most Mexicans fall deeper into debt and poverty.

The bond buybacks have also fueled criticism from economists in Mexico. But in Mexico, those who echoed the arguments of the conservative U.S. lawmakers were largely from the political left.

Jose Luis Calva, a professor in the left-leaning economics department at the Autonomous National University of Mexico and an outspoken critic of the government’s free-market policies, is among many who believe that the government’s tesobono redemptions are a waste of the U.S. loans. The government, he said, should have defaulted.

“Investors knew the risks when they bought them,” Calva said. “That’s why the interest rates were so high.”



Calva and other Mexican economists also asserted that the U.S. loans--indeed, the entire $48-billion international credit bundle--are a stopgap measure to buy Zedillo time to radically restructure the nation’s debt and its economy as a whole.

“The bailout is insufficient,” Calva said. “Mexico’s dollar obligations this year alone amount to $80 billion, and the rescue package is only for $48 billion. At some point this year, Mexico will default. . . . The gap is too big.”

But the Mexican and U.S. officials who are administering the loan package--which secures the U.S. loans by channeling all Mexican oil-export revenue directly through U.S. government accounts at the Federal Reserve Bank--insisted that the risk of such a default is slim.


In fact, one official, who asked not to be named, said the biggest threat to the success of the U.S. loan package is the critics themselves.

If opponents such as D’Amato manage to persuade foreign investors that Congress can torpedo the remainder of the promised loans, the official said, that could transform their dire predictions into self-fulfilling prophecies.


On the Money Trail


Tracing the $5.2-billion first installment of Mexico’s $20-billion U.S. bailout.


The $5.2 billion started out at the Federal Reserve Bank in New York. $2.2 billion went to Mexican government accounts there under an earlier arrangement. $3 billion more arrived on March 15, after Mexico’s Congress approved the Clinton Administration’s $20-billion credit package.



Most of it never left New York, where Mexico used the first $4 billion to redeem Mexican government bonds, called tesobonos, that were held by American institutions, Wall Street speculators and wealthy Mexicans. The $1.2 billion remaining in Mexican government accounts will be spent in coming weeks to pay off more bonds.


Mexico’s next drawdown, $4.8 billion to be released in June, will redeem still more bonds and help bail out Mexico’s shaky banking industry. The money will be put into accounts belonging to the Mexican government, which will lend it to banks to cover their short-term debts. The final $10 billion will stay in a contingency account at the Fed. Mexico can tap it later this year for emergencies.

* What are Tesobonos?


Tesobonos, a contraction of the Spanish words for “treasury bonds,” are dollar-denominated Mexican government securities auctioned each week for periods of 28 to 180 days.

They were designed and first offered by the government of former Mexican President Carlos Salinas de Gortari in July, 1989, to encourage repatriation of Mexican capital. Tesobonos have been cornerstones of Mexico’s rapid economic growth and symbols of the government’s free-market reforms. They offer high yields, and have drawn billions of dollars of investment, largely from institutional investors in the United States and wealthy Mexicans.

Interest rates are fixed when the tesobonos are auctioned, and yields are immune to fluctuations in the exchange rate for the peso. But the short-term bonds carry high risk--principally that the government could default.



Mexico Watch

* Where the gold goes: The Mexican government has spent one-fifth of the controversial $20-billion U.S. bailout package.


* Trade: Truck traffic into Mexico at the busiest U.S. border crossing tumbled 18% in the first quarter, to well below pre-NAFTA levels. Business


BOLSA -17.22 1905.95

PESO +0.24 6.5250


* Trade partners: Mexico ranks third, behind Canada and Japan, in trade with the United States.