ECONOMY : Mexico’s Use of U.S. Loans Is Paying Off : First half of $20-billion credit line went to avoiding bond defaults. Peso has stabilized, but crisis is seen as far from over.

Four months after the United States began lending Mexico $20 billion to rescue its failing economy, President Ernesto Zedillo’s government apparently has stabilized financial markets--at least temporarily--as it has used the money to bail out investors.

Mexico has now spent half of the $20 billion. This week, as it received $2.5 billion more from the U.S. Federal Reserve Bank, it was clear that Zedillo’s strategy for using the money is paying off--at least in the short term. Officials here and in Washington said his government plans to use much of the second $10 billion in the same way it spent the first: redeeming high-risk, high-yield, dollar-denominated government bonds, known as tesobonos, that will come due in the months ahead.

Buoyed in part by the stabilizing effects of the U.S. credit, the Mexican stock market closed Wednesday and Thursday at its highest levels since the economic crisis exploded in December. And the peso has leveled off at about 6.2 to the dollar in recent weeks, after a months-long roller-coaster ride that robbed it of nearly half its value.

Although they caution that the economy remains vulnerable, market strategists are expressing new confidence in Mexico, indicating they believe a turnaround could come as early as next year.

Zedillo, a Yale-educated economist who inherited the financial crisis just three weeks into his presidency, was upbeat this week. “I believe it is very clear that the risk of financial collapse that our nation lived through during the first four months of the year has dissipated,” he told reporters.

But Zedillo conceded that the crisis is hardly over. In fact, he said, it is just reaching its peak in the lives of average Mexicans, “who are living through the most difficult moments of unemployment, and that is what worries me most.”

The credit package, a target of sharp criticism from conservatives in the U.S. Congress who view it as a bailout for the rich, has not helped the millions of Mexicans who have lost their jobs due to a record number of bankruptcies caused by the crisis. Nor has it curbed inflation rates likely to top 50% this year. And annual interest on most consumer credit is still as high as 100%.

Expenditures from the first $10 billion in U.S loans affected only wealthy Mexicans and the thousands of U.S. pension funds, mutual funds and other institutional investors who held the tesobonos.

“It hasn’t trickled down. People haven’t noticed it,” said independent analyst Sergio Sarmiento. “But it wasn’t supposed to do that. It was not supposed to solve the crisis.

“The money was meant to replace tesobonos coming due this year with longer-term debt. And in that sense, it fulfilled its function. . . . The fact is that, in spite of all the fluctuations, the exchange market has stabilized.”

Mexico used the U.S. loans, along with billions in credit from the International Monetary Fund, to avoid a default on $19.5 billion in tesobonos that matured during the first half of this year. Such a default would have left thousands of U.S. and Mexican investors holding worthless paper and would have ruined Mexico as an investment market for years.

The second half of the $20 billion was originally intended as a contingency fund that Mexico could tap for emergencies. But during July and August alone, $6.8 billion in tesobonos will come due, to be followed between September and February by an additional $3.1 billion due.

Clearly, though, Mexico’s debt crisis has been sharply reduced.

During the coming six months, Mexico will have $29.5 billion in available credit--including the remainder of the U.S. loan. But it will have to pay off only $15.4 billion in debt. And Mexico’s foreign exchange reserves have grown significantly since the crisis began--from $6.1 billion on Dec. 31 to $10.1 billion at the end of June.

“This implies that we will not have to use all the funds available to us,” said a Mexican Treasury spokesman.

“The government still has a lot of bills to pay,” concluded Sarmiento. “But the president is right that the biggest risk of default has passed. Now, of course, the biggest job ahead is fixing the Mexican economy as a whole--increasing domestic savings, which is the root of this problem, and restructuring the economy.”

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Money Flow

With this week’s installment of $2.5 billion, the United States has delivered more than half of the credit line that it promised Mexico.

Background

Investors swept billions of dollars form Mexico in December, devaluing the peso by more than 40%. The hope on both sides of the border is that U.S. loans will stabilize Mexico’s economy and bring investors back.

U.S. Loans

To come: $7.5 billion

Received: $12.5 billion