U.S. bails out Mexico with $20-billion

In the largest U.S. bailout of a foreign government, American and Mexican officials signed a rescue package Tuesday that extends $20-billion in U.S. loans and guarantees in return for pledges from the Mexican government to reform its economy.

U.S. Treasury Secretary Robert Rubin and his Mexican counterpart, Guillermo Ortiz, capped five days of negotiations here by signing the agreement in the opulent "Cash Room" of the Treasury Department, where Americans a century ago went to exchange their government bonds for money.

Rubin said Americans had "an enormous stake" in helping Mexico. He said the rescue package, sketched out by President Clinton three weeks ago, would protect U.S. export jobs, limit the illegal immigration of Mexicans and add stability to the region.

"We begin today the important work of helping Mexico restore its economy," Rubin said. "It will not happen overnight, nor will it be easy. But in the final analysis, Mexico has chosen the right course and so have we."

The U.S. commitment is part of a $52-billion international effort to save the Mexican economy from collapse. The value of the peso has dropped by nearly 40 percent since mid-December because of investor fears about the economic and political future of Mexico.

Part of the U.S. goal in trying to stabilize the peso with the loan package is to recoup some of the U.S. export market. A strong peso makes U.S. goods cheaper for Mexicans to purchase.

But economists said the economic downturn in Mexico is certain to diminish the demand for imports, and buying a dollar today costs 5.6 pesos, compared with 3.5 pesos before Dec. 20.

Ortiz emphasized that the government of President Ernesto Zedillo understood that unpopular measures had to be taken to repair the damage from the peso crisis.

As a first step, Mexico's central bank raised its short-term lending rate to 50 percent Monday. The rate increase will place a burden on Mexican companies and consumers, and curb economic activity. But at the same time, it has sent a message to investors that Mexico is serious about tackling higher inflation and runaway money growth.

Ortiz said Mexico would have to take even further steps to restore confidence, such as slashing government spending, cutting back the nation's trade deficit, capping wages and reducing inflation through tight credit.

"This program will only work if Mexicans put all their efforts to overcome this very difficult situation," Ortiz said. "We're already doing that. We have a strong program, and we're committed to its full implementation."

A senior Mexican official said the economic package could cause problems at home, but the Mexican government had no alternatives.

"Obviously, this is not easy," the Mexican official said. "The conditions that Mexico is facing are difficult, but there is no other way out."

The most pressing financial problem for the Mexican government is refinancing its short-term debt, which amounted to $29-billion at the start of the year. Ortiz said the goal was to reduce the amount of short-term obligations to $15-billion and convert debt into longer-term securities with lower interest payments.

Mexico will use most of the dollars it gets to refinance debt or to shore up its banking system, a senior Treasury official said. The money will be disbursed in stages, based upon economic conditions set forth in the agreement.

The U.S. government will earn a fee for loans and guarantees, and the U.S. Treasury may turn down any request for funds if it determines the use to be inappropriate, the Treasury official said.

In addition, the Mexican government has agreed to make public key fiscal and monetary information. At any time, the U.S. government can declare Mexico in default of its agreement.

The $20-billion in U.S. assistance is coming from a fund that was established to support the U.S. dollar. President Clinton tapped these resources after his original proposal to get congressional approval for $40-billion in loan guarantees ran into heavy opposition.

Opponents, however, continued to charge that Clinton was acting beyond his authority and putting U.S. taxpayers at risk in a huge bailout of international investors who were caught facing losses when the peso began to plummet.

Conservative columnist Pat Buchanan denounced the arrangement as a "daylight robbery of the nation's wealth."

Buchanan, who sought the Republican presidential nomination in 1992 and is considering another run, said the "Republican Congress should go on record repudiating this outrageous seizure of undelegated power by Clinton and Rubin, and this illicit transfer of $20-billion that American taxpayers will never see again."

In Mexico, although the rescue package may allay investor fears by creating a financial safety net for the government, it could increase its political problems.

The remedies the United States and Mexico are pushing to restore investor confidence will cause economic pain and could lead to unrest, especially among middle-class and poorer Mexicans, economists say.

In addition, one condition of the rescue package _ securing all U.S. loans and guarantees with export revenues from Mexico's national oil company, Pemex, could spark nationalistic anger in Mexico. Pemex and its vast oil reserves are considered a national treasure and are a source of intense pride.

For the next 10 years, Pemex customers will direct payments to the New York Federal Reserve Bank, which, in turn, will send them on to Pemex. But if Mexico defaults on any of its agreements, the Fed could shut off the cash flow to Pemex.

The effects of Mexico's higher interest rates are felt by ordinary Mexicans, whose car and house payments have doubled since the currency devaluation, and by businesses, where higher interest payments mean layoffs and closings.

"A recession and greater poverty are what is coming," said Alvaro Arreola, a political science professor at the National University in Mexico City.

Stock market investors interpreted the deeper recession as a sign that company earnings would be hurt and sold stocks Tuesday, driving the market down almost 5 percent. The peso weakened slightly against the dollar.