CONTRARY to some reports, the recent debt-reduction agreement between United States banks and the Mexican government is not a ``historic breakthrough.'' Since the deal will lead to new loans to Mexico, it really represents a new mechanism for the US to continue supporting Mexico's failed economic policies. When the dust finally settles from the deal, we'll find the US taxpayer at greater risk and Mexico more indebted than ever. In theory, under the deal, banks agree to lower the Mexican government's debt burden in exchange for a promise that various parties (including US taxpayers) will pay the banks the remaining balance if Mexico cannot. However, the agreement also gives banks the option of making further loans to Mexico rather than reducing existing debts. Many banks will likely choose the latter option.
Hence, there is a lot less debt reduction coming than one might think. The lack of debt reduction, though, is not the real problem with the agreement. The deal's basic flaw is that it lacks strong conditions to encourage Mexico's President Carlos Salinas de Gortari to pursue promises of economic reforms. Without reforms, little is accomplished, since Mexico's debt problems stem from its destructive economic policies.
Nevertheless, the US Treasury has already decided to help Mexico by lending it $2 billion. Despite the fact that Mexico is on the brink of insolvency, the immediate risk is probably not that Mexico will default on the loan. The US government will probably be able to ``persuade'' US banks to lend Mexico the money to repay the Treasury. The real risks lie in the consequences of forcing banks to ``send good money chasing after bad.''
These risks are not simply that some big banks might lose some money. Federal deposit insurance means that taxpayers ultimately risk having to pay for a bank's losses. The US taxpayer also helps underwrite the World Bank, which is lending money to Mexico as part of this deal. In short, the US government is betting taxpayer dollars that the Mexican economy will not go down the tubes.
Without reforms, it is a foolish bet, as the following facts make clear:
Destructive policies: Funded by massive foreign borrowing, Mexico created extensive social-welfare programs and nationalized industries during the past two decades. As a result, Mexico's economy has shrunk 20 percent over the past eight years. Wages have plummeted nearly 50 percent since 1982, after adjusting for inflation. Export-oriented industries are being stifled by fixed exchange rates, price controls, and confiscatory taxes. Government policies have destroyed investors' confidence, who have sent billions in capital to banks in the US and Europe.
Privatization: Despite claims of reform, the vast majority of companies in Mexico remain in the government's hands and are not being offered for sale. According to the Mexico-United States Institute, the 755 state companies identified as up for sale in 1988 represent less than 10 percent of Mexico's state-controlled assets, leaving government monopolies in banking and basic industries unaffected. President Salinas and other government officials have repeatedly promised labor unions and other party members that the Mexican government will not sell ``strategic'' industries.
Foreign and domestic debt: Mexico's $100 billion foreign debt is well known; yet it also has a growing domestic debt that now stands at over 25 percent of gross national product, or roughly $55 billion. The domestic debt burden is particularly severe due to interest rates that reached 60 percent in July.
According to Mexican economist Luis Pazos, Mexico's chief financial burden is making interest payments to its people, not to foreign banks. Servicing Mexico's domestic debt requires four times more government revenues than do payments to foreign banks. In a recent interview, Citicorp chairman John Reed said that the Mexicans ``are not drowning from their foreign debt burden, they're drowning from their domestic debt burden.''
High inflation and budget deficits also represent problems. Mr. Pazos states that after 20 years of reckless economic policies, there is little available savings left in the country for the government to borrow. That would explain why the Mexican government is so eager to get an additional influx of money, as it would allow them to avoid making needed reforms. That is also why, instead of pumping further money into Mexico, the US government should insist on reforms.
US banks made the mistake of lending in Mexico to begin with; let them figure out how to cut their losses. The US government should not force banks to send good money chasing after bad. And it certainly should not put taxpayers' hard-earned dollars on the line in an attempt to bail out Mexico.