So What Took Them So Long?

By Christine Gorman

In the seven years since its debt crisis first erupted, Mexico has struggled to make the economic reforms demanded by its creditors. The government has broken up some state monopolies, curbed subsidies and imposed such severe austerity measures that the country's standard of living has fallen below what it was a decade ago. Yet Mexico's economy has stagnated, largely because of its crushing debt burden (current total: $100 billion).

For all its trouble Mexico is finally getting a modest dose of debt relief, but whether it will be enough to right the country's economy is in question. Last week Mexico and 15 of its largest creditor banks said they had reached a tentative agreement under which the country will save some $12 billion in payments over the next four years on its foreign-bank loans; these represent $54 billion of its total debt. Mexico's President Carlos Salinas de Gortari hailed the agreement on television, declaring, "This is the culmination of one of the most difficult, complex and tense financial negotiations ever conducted in the history of our country."

The Mexican accord is the first concrete result of U.S. Treasury Secretary Nicholas Brady's four-month campaign to break the impasse on Third World debt by persuading commercial banks to accept some cuts in the principal or interest rates of their loans. Brady's predecessor, James Baker, whose 1985 debt plan provided for no such relief, had failed to ease the problem. With the Mexican accord in hand, Brady hopes that similar agreements between the banks and other developing countries may soon be worked out.

Under the new scheme, the commercial banks will have three options. They may cut the outstanding balance of their Mexican loans by 35%, reduce the interest on such loans from a floating rate (which has ranged from 9% to 14% and is currently 9.5%) to a fixed level of 6.25%, or provide a 25% increase in credit over the next four years. The 15 commercial institutions that took part in the negotiations hold the majority of Mexico's commercial-bank debt. But for the plan to be effective, the banks will have the tough task of persuading 500 of their smaller brethren, which carry the rest of the debt, to go along.

All told, the plan may provide Mexico with about $4 billion in loan reductions, $6 billion in interest-rate reductions and $2.5 billion in new credits. That is much less than the 55% debt relief, or $29.7 billion, that Mexico originally asked for. Under the new agreement, "we shall not see spectacular results from night to morning," Salinas acknowledged in his broadcast. But the agreement produced an almost immediate benefit in restoring some confidence in Mexico's financial stability. Domestic interest rates, which had risen to 56% this year, have fallen 20 percentage points in the past three weeks because financiers anticipated the debt deal. That shift, which will reduce Mexico's cost of financing its budget deficits, gives the country another much needed boost toward new growth.

With reporting by Gisela Bolte/Washington and Andrea Dabrowski/Mexico City