WITH A LOT OF LUCK, the new debt relief package negotiated between Mexico and its commercial bank creditors will enable that country to escape its economic swamp. The chances are equally good, however, that it will mire Mexico even deeper in debt.
When he set out last spring to renegotiate his country's $52.6 billion bank debt, Finance Minister Pedro Aspe hoped to cut $5 billion from Mexico's annual outflow of dollars for debt service, freeing resources for badly needed domestic investment. He got it - but only by making rosy assumptions about future interest rates and oil prices. If money market rates of interest remain at or below present levels, and if oil stays at $20 a barrel, Mexico could find that its financial troubles are over. But the debt accord itself is likely to improve the country's cash flow by $3 billion a year at best. Mexico still will have to channel about $7 billion to creditors abroad each year. It will have difficulty raising that amount if oil prices weaken.Only a fraction of Mexico's foreign debt is being restructured. Nearly half of the debt, which totals about $105 billion, is owed not to commercial banks but to foreign governments or multilateral financial institutions, such as the World Bank. Of the $52.6 billion owed to the banks, only 80 percent, or about $41 billion, is subject to debt reduction. The potential reduction in outstanding bank debt is 27 percent - far closer to the banks' original offer of 15 percent than to the Mexican government's proposal of 55 percent.
The restructuring gives Mexico's 500 creditor banks a choice of options. They may forgive 35 percent of their loans in return for market-rate interest on the remainder, swap old loans for 30-year bonds of the same face value but paying only 6.25 percent interest or provide new loans equal to 25 percent of their existing exposure. The first two options will result in real improvements in Mexico's cash flow. But if a large number of banks choose the third, Mexico will find itself even deeper in debt.
Whatever options individual banks choose, Mexico will enjoy a brief breathing spell, allowing President Carlos Salinas de Gortari a couple of years to get Mexico's economy into gear. His success will depend upon the willingness of Mexican investors to bring their money home. An estimated $80 billion of Mexican capital is now invested abroad, most of it in the United States. Only assurances of low inflation, a stable peso and economic growth will induce Mexicans to put that money into farms and factories in Mexico.
The Mexican agreement rates as a disappointment for Treasury Secretary Nicholas Brady. The agreement is the first to be negotiated since Mr. Brady declared in March that the developing world's debt crisis can be resolved only through debt reduction. The relatively modest reductions won by Mexico, with its exemplary record of domestic economic reform, offer little hope for Venezuela, Costa Rica and the Philippines, which are soon to enter rescheduling talks.
It required considerable pressure from Mr. Brady to persuade the banks to concede as much as they did to Mexico. The Treasury's active participation will be all the more necessary if other debtor nations are to gain anything at all from the Brady Plan.