Recovery? Donde ? : Loan Repayment Changes Little for Struggling Mexicans

MEXICO CITY — President Clinton was relieved. Mexican President Ernesto Zedillo was thrilled. But the announcement that Mexico would repay its U.S. emergency loan three years early didn’t impress Armando Suarez, a bank employee on his lunch break Wednesday.

“This payment really doesn’t change anything very much,” sniffed the 27-year-old banker, studying the headlines at a newspaper kiosk in the city’s business district.

“You feel the situation is going downhill. Prices go up, and you see lots of poor people in the streets.”

As if to underline his words, a haggard young man stood nearby with one bony hand outstretched toward passers-by, the other clutching his toddler to his grimy T-shirt.

Mexico’s announcement Wednesday that it would make the final $3.5 billion payment on the U.S. bailout illustrated the sharp turnaround in the country’s international financial standing.

But on the streets of Mexican cities, the economic recovery is still a distant glimmer.

Wednesday’s announcement “has very little to do with improvements in the domestic economy. If anything, that’s the one part still lagging,” said Jonathan Heath, an independent economist.

President Clinton orchestrated the bailout after Mexico’s peso crashed in December 1994, raising the danger of a Mexican default on a mountain of dollar-denominated debt. Panicked foreign investors yanked their money from Mexico and other developing countries.

But within a year, Mexico was once again being welcomed as it sought to sell bonds to foreign investors. They were impressed by the government’s strict austerity program, which stabilized the economy.

Investors were also lured by relatively high-yielding bonds at a time when rock-bottom U.S. interest rates make Treasury bonds less attractive. Last year, Mexico was able to raise a stunning $14 billion from private sources, much of which went to repaying the U.S. Treasury.

Many analysts credit the Mexican government’s tough austerity package with putting the country on the road to recovery. Inflation plummeted by nearly half last year, to 27%. The peso ended its roller-coaster performance. And the economy grew 4.5% in 1996.

But the government’s decision to maintain high interest rates and raise taxes clobbered consumers. Meanwhile, inflation spurred by the devaluation ate into workers’ paychecks. The result is that workers’ purchasing power is far below its pre-crisis levels.

Figures released this week showed that real manufacturing wages had declined year-to-year for the 22nd straight month in October. Supermarket sales are down about one-fifth from before the economic crisis began, reflecting how pinched many consumers are.

While consumers faced inflation that rose faster than their paychecks, they’ve also had to spend an increasing part of their wages on home or credit-card loans, whose rates remain prohibitively high.

While consumer spending is expected to begin recovering this year, it could be another two years before it hits 1994 levels, economists say.

Zedillo recognized the economic difficulties of most Mexicans in a speech Wednesday morning announcing the loan pre-payment.

“In 1996 a recovery of employment and production began in many sectors of our economy,” he said. “Now, our challenge is to consolidate the recovery, and ensure that it is felt by families and businesses.”

But there is plenty of reason to welcome the early repayment, not only here but in Washington.

Analysts in Washington said it is likely to yield some important dividends:

* By bolstering international confidence in Mexico, it should enable the country to attract more business investment and loans--money that the Mexicans will need for their economy to get fully back on its feet.

* Clinton’s own ability to conduct a more activist foreign policy should be strengthened--even when the remedy necessarily involves U.S. participation in an economic rescue package.

* The success of the loan bailout is expected to help the administration dampen opposition to the North American Free Trade Agreement.

Although NAFTA did not in itself help Mexico repay the loan early, Treasury Secretary Robert E. Rubin argued Wednesday that without it the Mexicans might well have reimposed their old trade barriers.

Rubin--the man who put the loan package together in 1995--told reporters that, given “the enormous political difficulties we’ve had” with the rescue package, it was unlikely that Washington would want to go it alone in bailing out other financially strapped developing countries any time soon.

Indeed, the administration has taken some steps to reduce that prospect.

For instance, at U.S. insistence, the International Monetary Fund has established a new $25 billion kitty to finance similar rescue efforts, should any arise. While Washington would contribute, the burden would be shared by other rich countries and emerging Asian powerhouses as well.

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