Because Mexico’s leaders pushed their country’s borrowing too far ahead of its economic growth. It’s like a guy whose business is doubling every year, but whose debt is tripling. When his creditors wake up and ask for some money back, he doesn’t have the cash. It might take him a couple of years to raise it. Meanwhile, he needs some more credit to keep his business going.
Exactly. Mexico has grown consistently for half-a-dozen years, and its government finances are solid – its federal budget has been balanced three years running. So Mexico looked like – and was – a great place to invest. But foreign lenders, mainly American banks and pension and mutual funds, overdid it. From 1991 through 1993 they loaned Mexican enterprises and the government $15 billion to $25 billion a year more than Mexico was earning from its exports. Late last year, this thundering herd of creditors woke up and asked for some money back. Mexico had no way to pay. That’s because Mexico has $28 billion in dollar-denominated Treasury notes – the so-called tesobonos – coming due this year. And $16 billion of that is owed to Americans.
The big American banks, along with the IMF and foreign central banks, will help. But most of the Mexican loans are owned by thousands of U.S. mutual and pension funds and retirement accounts. They have ironbound legal obligations to pay benefits to tens of millions of Americans, mostly small savers. There is no practical way to demand new loans from them.
A lot of them have already lost a bundle on the collapse of Mexican stocks and the 44 percent drop in the peso. But yes, on the tesobonos and bonds, the big boys get bailed out. It can’t be helped. When it comes to these securities, there’s no separating the wolves from the sheep.
The United States cosigns for new Mexican borrowing in international bond markets. This lets Mexico pay off tesobono creditors who want out. It also helps raise new funds to finance the trade deficit until the deficit is slashed. Mexico plans to slice the deficit in half, from $28 billion last year to $14 billion this year.
Probably not. Like any investment banker, Washington plans to charge Mexico underwriting fees, 2 percent or more per year, for any amount it guarantees. To insure against loss, the government would also require that all U.S. private payments for Mexican oil go through the New York Federal Reserve Bank. If Mexico defaults on its American-guaranteed credits, the United States automatically recovers the money it has to pay out from these oil accounts.
Mexico would be thrown into deepening crisis and depression. It would immediately default. Mexico could stiff its creditors, postponing the repayment of principal for several years, and probably lower the interest rate that it would pay as well. Nobody would give Mexico any new loans in these circumstances. So Mexico would be forced to clamp strict quotas on its imports, possibly slashing U.S. sales there by as much as $20 billion, throwing hundreds of thousands of Americans out of work. The United States accounts for 87 percent of all Mexican imports. Such a Mexican crisis could trigger fallout crises in many Latin American and Eastern European countries. The world economy itself could be jolted.
Because the finances of the bailout are confusing and hard to explain to taxpayers. Also, Mexico might not be doing enough to help itself. Many Democrats on the Hill are refighting NAFTA – if no guarantees are issued, NAFTA is dead. Republicans don’t like bailouts of anybody, let alone foreigners. And Americans ask, if we do it for Mexico, why don’t we do it for, say, Orange County? It just lost a couple of billion dollars shooting crap with its investment funds in risky securities.
Because Orange County and its parent state, California, are rich enough to work their way out on their own.
PHOTO: Dollar imperialism? A protest against the American bailout plan in Mexico City.
