Mexico shows the way

One of the most challenging issues facing the leaders of the seven industrial nations now meeting in London is how to deal with the $800 billion or so in debt owed by developing nations.

In that regard, the summit leaders have a clear role model to look at in putting together a solution: namely, the debt agreement now being worked out between Western banks and Mexico.

Federal Reserve Board chairman Paul Volcker - who has followed the third-world debt issue perhaps more closely than most heads of state - calls the new Mexican approach a ''pattern'' that could well be used in renegotiating third-world debt. And indeed, the Mexican agreement comes at just the right moment. The presidents of seven Latin nations whose governments collectively owe Western and Japanese banks $350 billion have sent a plea to the summit leaders to find an urgent solution to the problem.

Thus, the Mexican loan renegotiations seem particularly important. They involve quid pro quos. From Mexico, tough austerity measures. From the commercial banks, a willingness to ease repayment terms.

Bank lenders have now signaled that they will enter into negotiations with Mexico to ease existing loan repayment terms on that nation's $90 billion foreign debt. The bank lenders note that Mexico has done well in bringing its economic house under control. Mexico has cut imports, reduced subsidies, and brought down its budget deficits.

But there is more involved here than just good work on Mexico's part. Rising interest rates in the United States are pushing up Mexico's interest costs - as climbing interest rates are doing with other Latin nations, since interest rates tend to be linked to the US prime rate. Rising interest rates could work against economic recovery. Each 1 percent rise in interest rates pushes up Mexico's loan costs by $700 million annually.

Under terms of the new agreement expected to be worked out, loan payments due between 1985 and 1988 will apparently be stretched out for 10 years.

There would be no repayment of principal during the first five years. Interest rates would be lowered.

The approach involving Mexico - handling the debts on a case-by-case basis - seems preferable to some form of overall policy involving all third-world loans. That is not to rule out the possibility of seeking some form of ''cap'' on the interest rates that banks could charge debtor nations. Volcker has proposed such a measure. But it seems prudent that each nation's loan package be dealt with on an individual basis, lest some nations be tempted to undo the very fiscal reforms that were adopted to obtain the loans in the first place.

You've read  of  free articles. Subscribe to continue.
QR Code to Mexico shows the way
Read this article in
QR Code to Subscription page
Start your subscription today