Mexico: Frightening Specter of Bankruptcy

An ailing neighbor looks to Tio Sam for a helping hand

Finance Secretary Jesús Silva Herzog exuded a somewhat forced air of confidence as he addressed his countrymen last week. Like a terminal-ward doctor polishing his bedside man ner, he likened Mexico's economy to a "sick patient" who required different treatments as his condition fluctuated.

With an unemployment rate of more than 50% and inflation that threatens to reach 100% by year's end, Mexico's economy is certainly ailing. In fact, the economic cri sis was widely viewed as Mexico's worst since the 19 10 revolution.

But to many Mexicans, the govern ment's drastic prescriptions seemed near ly as bad as the disease: the imposition of strict currency controls, an effective freeze on most dollar accounts, sharp price hikes and the second peso devalua tion in six months. Most was Silva Herzog's admission that Mexico was unable to meet current payments on its huge $80 billion foreign debt, among the highest in the Third World. The statement raised the specter of a possible default that would have a domino effect on the international banking system. No one was more concerned than U.S. bankers, who hold about 60% of Mexico's debt.

Indeed, rumors ripped through Wall Street late last week that two major New York banks, Manufacturers Hanover Trust Co. and Chase Manhattan, had extended so many loans to Mexico that a default would leave them insolvent. Both banks denied the reports, but rates for three-month maturity U.S. Treasury bills plunged to a 26-month low of 6.99%. Three of the world's largest banks—Bank of America, Citibank and Lloyds Bank of

Britain—were reported to have the greatest "exposure," in banking terminology, to Mexican borrowers.

To forestall a default, Silva Herzog had spent a weekend in New York City just before his televised speech. He returned home with the promise of a $1 billion advance against future oil sales from the U.S. Treasury's Exchange Stabilization Fund and another $1 billion loan from the Commodity Credit Corporation for grain purchases from the U.S. Meanwhile, an additional loan of $1.5 billion was being negotiated with the central banks of seven other Western countries and Japan.

After his speech, Silva Herzog returned to New York to meet with representatives of about 115 international banks that hold Mexico's foreign debt. He requested a 90-day postponement of loan repayments totaling some $10 billion. Silva Herzog added that Mexico would require between $500 million and $1 billion in additional credits over the next year. The proposals were accepted in principle.

The key to the salvage effort is Mexico's application to the International Monetary Fund for about $4 billion in loans over the next three years. Banking sources said that the request might be approved within six weeks, which would in turn give the commercial banks enough confidence to reschedule Mexico's debts. But the IMF is likely to demand some painful belt-tightening measures, including wage freezes, import restrictions and reduced government subsidies, which could dangerously aggravate social tensions in Mexico.