Mexico to Get Jump on Repayment of Its Bailout Debt to U.S. : Aid: Clinton calls early return of $700 million--the first installment--a vindication of his policy.

Mexico has agreed to an early repayment of the first installment on its bailout from the United States, President Clinton announced Thursday.

Just days before Mexican President Ernesto Zedillo arrives in Washington for an official visit, Clinton said Mexico will repay the first $700 million on the $12.5 billion it borrowed in the wake of the nation’s financial crisis that began last December.

The Clinton Administration quickly held up the early repayment as vindication for the controversial bailout plan and for the Administration’s international economic policies.

Clinton was informed of the repayment Thursday in a phone conversation with Zedillo, and later hailed the action as “a positive signal to the financial markets that the tough financial measures Mexico has undertaken are succeeding and the American taxpayer is being repaid ahead of schedule.”

At a news conference in Mexico City, Treasury Secretary Guillermo Ortiz said the early repayment was made possible by Mexico’s successful sale of 1 billion German marks in five-year bonds Thursday, raising about $700 million on international money markets.

That the bonds were readily snapped up by the private sector was widely interpreted as a sign of confidence. Mexican stocks, which have declined sharply over the past week, rallied on Ortiz’s announcement, with the Mexican stock exchange index gaining 80.52 points, or 3.6%, to close at 2,347.65.

After enduring bitter criticism from Republican lawmakers that taxpayer funds were used for a needless bailout that would only benefit the financial elites in Mexico and on Wall Street, Clinton Administration officials seemed relieved to finally have some evidence that their policies are working.

“What this says is that we kept our promises,” said Deputy Treasury Secretary Lawrence Summers, who handled the Mexican bailout earlier this year. “President Clinton and Treasury Secretary (Robert E.) Rubin said that if the United States and Mexico did what they needed to do, this would work. Now, Mexico is moving back into the private capital markets.”

When Mexico faced a sudden meltdown following the devaluation of the peso last December, the Clinton Administration stepped in with a $20-billion bailout, from funds normally used to stabilize the value of the dollar, as part of a larger, $50-billion international rescue package.

The Administration said if the money was not made available, Mexico would face severe hardship and the financial crisis would have a domino effect on other developing nations.

Mexico’s financial condition has stabilized enough that the government has only drawn down $12.5 billion of the U.S. funds.

The $700 million to be repaid early is part of $2 billion in short-term debt that is all due to be repaid by the end of January. The total $12.5 billion is due for repayment over five years. Meanwhile, Mexico has also paid $468.4 million in interest on its loans, U.S. officials said.

Yet Administration officials cautioned that the action doesn’t mean that Mexico is out of the financial woods--or that the bailout program is completed. Officials pointed out that the Mexicans still have access to the full $20-billion fund if the financial crisis resumes. “It’s not over yet,” said one U.S. official. Indeed, recent declines in Mexican stock prices and a weakening of the peso have been attributed to investors losing patience with government inaction and worsening problems in the country’s economy, which was driven into deep recession by the devaluation.

Still, a new report by the International Monetary Fund suggests that the worst is over for the Mexican economy. In its newly released world economic outlook, the IMF said that “the rapid pace of adjustment” in the Mexican economy to the peso crisis “suggests that the Mexican economy should soon recover.”

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Times wires services contributed to this report.

* DISCIPLINE LESSON

Latin America has overcome the worst of the peso crisis. D12