Banks, Mexico Complete Round 1 of Debt Negotiations

By , Staff writer of The Christian Science Monitor

LAST Friday, commercial bankers and the government of Mexico completed what some creditors are calling the ``first step'' in their debt negotiations. The agreement to roll over short-term loans is expected to give Mexico and the banks time to negotiate a new agreement on debt and debt-service reduction as well as new loans.

This was the first round of negotiations since Treasury Secretary Nicholas Brady announced his plan to reduce third-world debt March 10. Mexico and the 15 leading creditor banks agreed that principal payments due between July 1, 1989 and March 31, 1990, totaling $1.175 billion, will all become due July 1, 1990.

In a step toward helping Mexico's trade, the bankers and Mexico agreed to exclude trade-finance loans from future negotiations and to continue paying these loans when they are due. This should help Mexican businessmen and US exporters to Mexico.

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The US negotiators, known as the Bank Advisory Committee, endorsed the proposal in a telex sent to Mexico's creditors Friday.

``This suggests the negotiations are beginning in a constructive way,'' says John Williamson, a senior fellow at the Institute for International Economics in Washington. Mr. Williamson says it indicated the Mexicans can now negotiate with the bankers in good faith without getting their short-term credits squeezed further.

In fact, a banker involved in the negotiations pointed out, the initial talks were completed in 48 hours. Some analysts had suggested the talks might last for weeks.

In a prepared statement, both Mexico and William Rhodes, a Citibank official who is heading up the negotiations for the creditor banks, said the talks will continue ``to develop a specific proposal to creditor banks worldwide to address Mexico's external financing and growth requirements.'' The talks are expected to continue this week.

Mr. Rhodes said in a speech last Thursday that the results of the negotiations will help ``define the Brady initiative.''

A bank official involved in the debt negotiations also confirmed that the Group of Seven (G-7) has requested a meeting with the 17 to 18 international banks that meet every quarter to review the total third-world debt situation. This group, known informally as the Baker Initiative Committee, is composed of US, Japanese, European, and Canadian banks.

The meeting should be useful to the bankers since they are complaining that the G-7 countries, the International Monetary Fund (IMF), and the World Bank have not decided yet on how to allocate funds toward debt reduction. Three weeks ago, the G-7, which is composed of the US, Canada, Japan, Italy, France, West Germany, and Britain endorsed the concept of the Brady plan but did not give any specific recommendations.

THE countries are undecided on how much money to put up initially, what conditions to attach to its use, and whether the funds will be used to reduce the total amount of debt outstanding, or the interest payments. After the IMF and World Bank meeting three weeks ago, the two institutions assigned task forces to study the issues.

Since the meeting, bankers point out that some of the major lending countries and commercial banks have been talking about the advantages of so-called exit bonds. These are bonds that are readily marketable for the same amount as an outstanding loan but carry a reduced interest rate. The advantage of these bonds is that they offer a country an immediate reduction in interest payments. In contrast, it takes a much greater reduction in the amount of principal outstanding to reduce a country's debt payments.

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