Mexico Plans to Repay Much of U.S. Bailout 2 Years Early

In a bold move that marks its return to international financial respectability, Mexico announced Tuesday that it will repay--more than two years early--nearly half the money it owes from last year’s emergency U.S. bailout.

Mexico said it will repay $4.7 billion of the $10.5 billion it owes the United States, mainly by taking out loans from private international investors through sales of government bonds and notes.

Mexico’s ability to borrow so heavily from private sources demonstrates how far the country has come since it reached the brink of economic collapse in December 1994, following a disastrous devaluation of its peso.

For the United States, Tuesday’s announcement was an important step toward closing the book on its biggest foreign financial aid commitment since the Marshall Plan.

As such, it should mean an election-year boost to President Clinton, who faced harsh criticism for the loan from some political opponents, particularly presidential hopeful Patrick J. Buchanan.

“This is good news,” said Deputy U.S. Treasury Secretary Lawrence Summers. “The Mexican economy is recovering, and Mexico is regaining access to the capital markets. Most important, American interests are being protected, as American support will be repaid and American exports to Mexico will increase.”

Arguing that Mexico’s financial collapse could have a devastating ripple effect throughout developing countries, the Clinton administration last year pledged $20 billion toward a $50-billion bailout package organized by the International Monetary Fund.

Mexico used $13.5 billion of the U.S. funds and had earlier repaid $3 billion, leaving $10.5 billion outstanding.

Mexican officials on Tuesday played down the early repayment, arguing that they had planned all along to give Washington its money back as soon as possible.

“The U.S. Treasury isn’t a normal creditor of Mexico,” Martin Werner, a senior Mexican treasury official, said in an interview. “It was an emergency. It was a necessity, and as soon as we reestablished credit, we planned to do this.”

Officials here noted that in swapping U.S. government debt for private loans, they would get lower interest payments. The Mexican government estimated it would save about $50 million a year in interest, in addition to spreading its debt over a longer period.

It will also give much-needed breathing space to Mexico’s government, which faced daunting loan payments in the next few years.

But other analysts noted that the move has major political significance.

“Why is [Mexico] retiring Treasury debt? It’s very short-term and highly volatile in this [U.S.] political year,” said Sergio Sarmiento, a leading political analyst.

“This is one way in which the Mexican government wants to send a message to the markets and to politicians in the States that it is willing and able to repay the loan that was given last year.”

The repayment will also probably earn the government points at home. Mexicans have been highly sensitive to the fact that their oil reserves were used to guarantee repayment of the U.S. loans.

Mexico wasn’t required to begin repaying most of the U.S. bailout until next year, and it didn’t face heavy payments until 1998 and 1999. But it had already repaid $2 billion in short-term debt that came due in January. It has also met more than $750 million in interest payments.

Mexico’s economy still hasn’t recovered from its worst depression in six decades. But it has made steady progress in recent months, as the government has pursued an unpopular austerity program.

Interest rates, which approached 75% last year, have dropped sharply. The once-wobbly peso has steadied. With exports surging thanks to a cheaper peso, the government expects to announce an end to the recession this quarter, with 5% economic growth expected compared with the same period last year.

With the economy stabilizing, the government was quickly able to return to international financial markets, raising money in several major bond sales. Its ease in borrowing contrasted sharply with the period after the 1982 debt crisis, when Mexico was effectively locked out of world financial markets for about seven years--stunting its growth.

But with millions of Mexicans jobless, or receiving paychecks that haven’t kept up with inflation, the recovery still isn’t apparent to many at the street level.

In addition, the country’s banks are still struggling under mounds of bad loans, a result of the recession and of happy-go-lucky lending before the crisis. The bank problem is expected to slow the recovery.

Mexico said it will finance the $4.7-billion repayment in three ways:

* It will sell a five-year, floating-rate government note to investors through international banks. Mexico is offering an interest rate of 7.69%, cheaper than the 10.16% it was paying for its U.S. loans. The notes will be guaranteed by Mexico’s oil revenues.

* It will use $920 million from its sale last month in Japan of yen-denominated, 10-year Mexican government bonds known as Samurai bonds.

* It will also use $780 million it received as a byproduct of its sale last month of 30-year government “global” bonds. The new bonds, which have no collateral, were offered to owners of Brady bonds, which are partly backed by U.S. Treasury bonds. Mexico thus freed up the money that had been used for collateral.

Mexico said it will borrow most of the funds from a syndicate of international banks led by J.P. Morgan & Co. and Swiss Bank Corp.

Times staff writer James Gerstenzang in Washington contributed to this report.