GET READY FOR MEXICO III? ‘OUR PROBLEMS ARE OVER’ — NOT!

(Washington, D.C.): Champagne corks have been
popping over the past thirty-six hours from Manhattan to
Mexico City with such ferocity as to nearly drown out the
self-congratulatory pronouncements issuing forth from
President Clinton, Mexican central bankers and some
congressional leaders. The source of such celebration:
the widespread belief that a deadly bullet headed their
way has been successfully dodged. This sentiment was
captured in a remark by Ariel Buira, vice-governor of
Mexico’s central bank, who was quoted in the Financial
Times today as saying: “Our problems are
over.”

In reality, the hastily constructed financial
assistance package unveiled yesterday — dubbed
“Mexico II” — that requires no congressional
approval may well meet the same fate as the original
gambit (which would have entailed Congress’ okay). This
downbeat conclusion arises only partly from recent,
bitter experience. Remember, initial market euphoria and
photo opportunities signalling congressional support
quickly gave way to recriminations and adamant opposition
to Mexico I; at least some of the same seems likely to
arise with respect to Mexico II.

Indeed, there are already serious splits on Capitol
Hill with Sen. Phil Gramm (R-TX) telling Fox Morning News
today:

“We need [the $20 billion that is supposed to
come from the Exchange Stabilization Fund] for our
own purposes and obviously, if we lose it here,
everybody in the country is going to be hurt.”

Rep. Patricia Schroeder (D-CO) signalled similar
divisions in the Democratic Caucus.

Even more troublesome though are the obvious,
potentially intractable difficulties likely to arise with
each of the component parts of the Mexico II package:

The Exchange Stabilization Fund (ESF)

Under the new Clinton plan, the bulk ($20
billion) of the financing needed to restructure $28
billion in tesobonos coming due in 1995 is
supposed to come from the U.S. Exchange Stabilization
Fund. Experts are perplexed how the function of that
facility can be stretched so as to permit it to perform
the task of providing medium-term sovereign lending to
foreign countries.

The Clinton Administration seems, nonetheless, to
have decided that it needs a new source of credit — or,
to put it less delicately, a slush fund — with which to
underwrite foreign policy initiatives. (Its predecessors
previously did serious damage to the Agriculture
Department’s Commodity Credit Corporation and to the
U.S. taxpayer’s equities for similar reasons.)

Given the vocal opposition of some 80% of the
American people to what is seen as an undisciplined
bail-out of corrupt Mexican officials and Wall Street
investors, it seems inevitable that Congress will, in due
course, turn on President Clinton. Sen. Frank Murkowski
(R-AK), for example, has already dubbed the Mexico II
package an “end-run around Congress.”

At a minimum, the legislature can be expected to
demand formal presidential notification concerning the
specific arrangements for conditionality and
particularly collateral to protect against losses in
the ESF. If Congress is dissatisfied with the response,
it is entirely possible that an initiative will be taken
to suspend follow-on ESF disbursements until such time as
satisfactory conditionality and collateral arrangements
are in place.

The International Monetary Fund (IMF)

The remainder ($17.8 billion) of the
financing needed to meet Mexico’s critical medium- term
requirements is supposed to come from an IMF Standby
Facility. By some accounts, this amount is double
Mexico’s permitted borrowing limit. Such lending by the
IMF would be unprecedented in the organization’s history
— both in terms of the aggregate amount and in terms of
the extent to which a country’s borrowing limit would be
exceeded.

By stampeding the IMF into such an inordinate lending
facility, the Clinton Administration may do lasting
damage to the Fund’s institutional integrity. This
prospect is made all the more likely by virtue of the
serious unhappiness evident on the part of some IMF
members — notably, the Europeans — who feel
multilateral resources should be going to meet the needs
of their regional financial crisis: Russia.

It should also be noted that the IMF and its
conditioned approach to lending are hot-button political
issues in Mexico under the best of circumstances.
The current situation — in which the PRI Old Guard and
the Zapatistas are putting the squeeze on President
Zedillo from the right and left, respectively, is likely
to produce additional domestic Mexican problems
with the IMF approach. Such a probability is further
increased by the glacial pace at which the Fund generally
operates. It is anything but a quick response team of the
sort President Clinton says the Mexican crisis requires.

Bank for International Settlements (BIS)

The other source of multilateral funds — the Bank
for International Settlements — which is expected to
double the $5 billion credit line it is currently
providing Mexico — has its own problems. First, its
short-term financing capabilities represent a maturity
mismatch given Mexico’s medium-term restructuring
requirements. Second, while the conditions for
disbursement are not known at this point, the reality is
that the BIS is a European-dominated institution. For the
reasons noted above, it is far from clear why the Germans
and others would fast-track disbursements of which they
do not altogether approve.

Investors/Commercial Banks

The other major source of funds — perhaps
on the order of $3 billion — is expected to flow from
American and international commercial banks with much
more coming from private investors. There are at least
two problems with relying on these sources to reignite or
resurrect foreign investment: First, a lot of these
investors have now been burned twice in the Mexican
market within a dozen years (i.e., in 1982 and 1994).
While investors generally will tolerate substantial
losses every twenty years, they are certainly not
going to rush to invest in a market that has proven far
more unstable. In fact, the Center for Security Policy
has learned that some Wall Street firms are encouraging
their clients to take advantage of the current, temporary
rise in the peso to cut their losses and exit the Mexican
market.

Second, there is a continuing deterioration in
President Zedillo’s political fortunes that is hardly
conducive to an attractive investment climate. Indeed,
there is a deepening sense of crisis: His opponents on
both the left and right smell blood in the water as the
economy under Zedillo fails to achieve the growth
necessary to keep them at bay.

What Should Be Done: Mexico III

In an analysis published on 27 January 1995⁽¹⁾ — before
the meltdown of Mexico I — the Center for Security
Policy called for a restructuring of the program in
several important ways, including:

• reducing the American taxpayer’s credit exposure
  by syndicating the rescue effort among
  multilateral and foreign nation lenders —
  particularly those which are capital-long but
  energy short who might be brought to see the
  benefit of a strategic partnership with a Mexico
  that is in the opposite situation;
• maintaining strict conditionality and collateral
  requirements; and
• initiating a crash program aimed at Mexican
  revenue enhancement.

Specifically, the Center recommended:

“…It is possible — and, indeed, prudent
— to turn to the private sector which is now able to
draw on U.S.-based oil-field equipment, services and
technologies. These assets can now be utilized
without oil company involvement or infringing upon
Mexican sovereignty concerns to exploit rapidly
proven, but not yet developed, Mexican oil reserves.
Such an energy-related initiative could utilize a
portion of the government- guaranteed loans to ramp
up Mexican oil production in short order. This would
help to collateralize and protect American and
Western taxpayer interests while simultaneously:
shoring up Mexican President Zedillo; expanding his
revenue base for needed development and social
programs; preserving the capitalist transformation of
Mexico; and putting NAFTA and its planned expansion
back on track.”

The Bottom Line

At this writing, it is clear that there is
going to be a critical congressional retrospective into
the decisions — and indecisions — that led to
the present Mexican financial crisis. That inquiry will
be all the more punishing for President Clinton as its
focus turns, inevitably, to a hastily configured, flawed
Mexico II package.

The Center for Security Policy believes that the
Clinton Administration could significantly improve its
prospects by integrating into its aid initiative what
might be called a “Mexico III” package.
Such a package holds out some prospect for resuscitating
growth in the Mexican economy by substantially increasing
in the near-term that nation’s oil revenues and, thereby,
creating a basis for the kind of properly conditioned
and collateralized lending on the part of U.S. and
foreign taxpayers and multilateral organizations that
will inspire investment and warrant congressional
support.

(1) See the Center’s Decision
Brief entitled Finally, Discipline, Conditionality
and Collateral — In Time for Mexico? Too Late For
Moscow! (Np. 95-D 05, 27
January 1995).