Mexico Obtains Loans to Avoid Election-Year Crisis

Mexican authorities, obsessed with avoiding yet another election-year financial crisis, said Tuesday that they have lined up $23.7 billion in loans to head off any turbulence during next year’s presidential campaign.

But they insisted the nation’s economy is so strong that they will never have to use it all.

The debt refinancing allows Mexico to reschedule part of its foreign-debt repayments due during the next 18 months to ensure the country can easily afford its installments in the 2000 election year. The package includes lines of credit worth $6.8 billion, providing a financial safety valve in case Mexico confronts unexpected pressures.

The Mexican stock market soared 3.56% on the news, continuing its five-month-long surge. Economists welcomed the refinancing package as an important step toward anticipating and avoiding financial problems rather than merely reacting after they occur.

Mexico plunged into chaos at the end of 1994, the previous election year, when it devalued its currency and couldn’t meet its debt obligations. That program required a $50-billion, U.S.-led rescue plan to solve. Indeed, every election year since 1982 has prompted a crisis here.

On Monday, President Ernesto Zedillo said he had ordered his top advisors to craft “a program of financial armor” to protect the economy from another end-of-term crisis; the refinancing plan announced Tuesday was the first foray.

Finance Minister Jose Angel Gurria and Central Bank Gov. Guillermo Ortiz jointly disclosed the smorgasbord of loans and credits arranged with institutions such as the International Monetary Fund, the World Bank and the Inter-American Development Bank.

But even as they disclosed the huge refinancing program, Gurria and Ortiz argued that Mexico’s strict fiscal and financial discipline of recent years would preclude another election-year crisis. They pointed to major changes from 1994 such as a healthy, market-driven currency, a much lower budget deficit, strong direct foreign investment and booming exports.

David Malpass, chief economist at Bear Stearns in New York, said, “This is a way for Mexico to look ahead. That’s a better approach than having to react once a crisis hits.”

Malpass wondered, however, whether many other countries could follow Mexico’s example, given its uniquely strong financial and trade relations with the United States. These ties give Mexico access to money that other developing countries covet.

Malpass dismissed suggestions that simply creating a refinancing scheme might send signals to the market that problems loom. “It’s like an individual at a bank who sets up a guaranteed line of credit. It’s a good precaution. It indicates good planning, not evidence of risk.”

The World Bank is among the lenders supporting the new package, with $5.2 billion in loans during the 1999-2001 period to finance development and infrastructure projects.

World Bank Director for Mexico Olivier Lafourcade said in a statement that the refinancing program is a way to “contribute to the government’s efforts to ensure a smooth transition from this administration to the next one as a result of next year’s elections.”

The financing also includes $4.2 billion from the International Monetary Fund, allowing Mexico to defer two-thirds of the debt repayments due to the IMF between July 1999 and December 2000 until at least 2003.

In addition to the new loans and rescheduling of payments, the package includes $6.8 billion in lines of credit from the governments of the United States and Canada, Mexico’s partners in the North American Free Trade Agreement. This would be available in case of “unexpected changes either in the international or domestic situation,” Gurria said.

World financial authorities recently have called for contingency mechanisms that would help countries avoid getting into disastrous financial crises in the first place rather than just bail them out afterward. The Mexican financing program is oriented toward that goal.

Gurria said Mexico’s economy is aligned for a crisis-free political transition in 2000--widely expected to be one of the most fiercely contested in Mexico’s history. He said economic growth is on track for a 3% increase this year and a 5% jump in 2000, with inflation falling from 13% this year to 10% next year.

But Ruben Ojeda, managing director of the Center for Private Sector Economic Studies, said the financing package is an important step toward building the financial armor that Zedillo has called for “because even though you don’t have a real problem, you have a problem of expectations.”