Breathing Room

As the price of oil has tumbled to nearly $10 per bbl., Mexico has been in ever greater danger of defaulting on its $98 billion foreign debt, a calamity that would shake the world financial system to its core. But Mexico took a step back from the abyss last week when its Finance Minister, Gustavo Petricioli, flew to Washington to sign an agreement with the International Monetary Fund that could generate $12 billion in new loans to spur Mexico's economy and make up for lost oil-export revenues. The deal was noteworthy because it suggested that the IMF could be moving away from its traditional emphasis on imposing austerity programs and toward a policy of promoting faster growth in debtor nations.

As usual, the IMF is requiring Mexico to restrain its public spending, but the country will be allowed to run a budget deficit that amounts to 10% of its gross domestic product. Earlier in the negotiations, the IMF had wanted Mexico to trim its deficit to 5% of GDP. The new loans are intended to help Mexico boost its growth rate from an estimated -4% this year to 3.5% in 1987. If the economy falls short of this goal, or if the price of oil drops below $9 per bbl., the agreement calls for additional loans. In return, Mexico pledged to continue a program of economic reforms, including denationalization of industries and liberalization of trade restrictions.

The country is still a long way from having all of its $12 billion in hand. The IMF is asking commercial banks, which already hold 75% of the Mexican debt, to provide $6 billion of the new credit. The bankers, who were stunned at the size of the request, say that negotiations on the terms of the loans could take months. But large creditors like New York's Citicorp ($2.8 billion already on loan to Mexico) will almost certainly have to go along with the IMF in order to reduce the risk of a default.