Mexico Making Early Payoff on U.S. Loan

MEXICO CITY — Mexico announced Wednesday it is repaying the last of the U.S. emergency bailout package three years early, putting a symbolic end to its disastrous peso crisis and handing President Clinton an unexpected foreign policy victory.

The $3.5-billion payment was the last chunk of a $13.5-billion emergency U.S. loan, part of Washington’s biggest foreign financial-aid commitment since the Marshall Plan.

Though Mexico’s troubles are far from over, the early repayment was a vivid demonstration of how quickly the nation has bounced back from the brink of financial ruin. And it signaled the government’s confidence that it will not need more U.S. assistance.

“Some people predicted that our country would collapse, that the foreign aid would be impossible to repay and would compromise our sovereignty,” President Ernesto Zedillo declared in a surprise announcement Wednesday morning.

“Despite the seriousness of the situation, our country rapidly overcame the emergency and set out on the road toward recovery.”

The loan was part of a $50-billion international aid package that Clinton scrambled to organize after Mexico’s peso went into free fall in December 1994, endangering the country’s ability to pay its debts. The threat of a Mexican default chilled investment in developing countries around the world and raised fears that a prolonged recession in Mexico would spur new waves of illegal immigration to the United States.

Still, the emergency loan was highly unpopular in both countries. Mexicans blasted Zedillo for putting up the country’s oil reserves up as collateral, while U.S. presidential candidates Ross Perot and Patrick J. Buchanan charged that U.S. citizens would wind up picking up the tab for a move that would benefit wealthy investors.

On Wednesday, such criticism disappeared. Officials announced that the U.S. government actually earned $1.4 billion in interest on the Mexico loan. That’s $580 million more than the U.S. would have received had it invested the money in U.S. Treasury notes, authorities said Wednesday.

“Two years ago, helping our friend and neighbor in a time of need was quite controversial,” Clinton declared triumphantly at a White House ceremony. “Some said we should not get involved, that the money would never be repaid, that Mexico should fend for itself. They were wrong.”

The early repayment also represents an important political boost for Zedillo. It enhances the country’s international standing, reduces potential U.S. leverage over Mexico’s economic and political decisions and returns control of its oil earnings, seen here as a symbol of the nation’s sovereignty.

Moreover, in transferring its loans from the U.S. government to private investors, Mexico has managed to swap the five-year U.S. loan for longer-term loans. And it has lowered its interest payments by more than $100 million annually.

“From our perspective--and the U.S. perspective--it’s a win-win situation,” said Alejandro Valenzuela, a Mexican Finance Ministry spokesman.

Mexico repaid its U.S. loan through a highly successful series of bond offerings that raised most of the $13.5 billion. In essence, authorities persuaded private investors in the United States, Europe and Japan to assume the “bailout” loan.

Such a result would have seemed impossible only two years ago, when lenders slammed their doors shut to Mexico. But the Zedillo administration confronted the crisis by putting itself on a strict economic diet--raising taxes, cutting spending and maintaining high interest rates to squeeze inflation.

The resulting recession caused enormous pain across the country. More than 1 million Mexicans lost their jobs, thousands defaulted on loans with triple-digit interest rates and paychecks were eroded by higher prices. Thousands of businesses closed their doors.

But the plan stabilized the economy. It slashed inflation by nearly half to 27% last year, stabilized the gyrating peso and eventually caused interest rates to drop. Meanwhile, exports soared as a cheaper peso made Mexican-made autos, T-shirts and television sets more competitive abroad. That generated plenty of dollars that the government could use to repay debts.

Such policies were the precise opposite of Mexico’s response to an earlier peso devaluation in 1982. At the time, the country hiked import duties, imposed exchange-rate controls and nationalized the banks. Trade with the United States stagnated, and free-market economies around the world once again shunned Mexico.

Jonathan Heath, an independent Mexico economist, noted that this time, the government’s commitment to free-market policies impressed investors.

“So how did the market respond? Last time, it took Mexico seven years to return to voluntary financial markets. This time it took only six months,” he said.

Mexico was also lucky: It went looking for investors precisely at a moment when mutual fund managers and others were hungry for high-interest bonds. With interest rates low in the U.S., the high yields promised by Mexican bonds suddenly looked appetizing.

“The success they’ve had in raising money on world bond markets has been stunning,” said Geoffrey Dennis, an analyst at HSBC James Capel, a Wall Street firm.

But if Mexico has regained the confidence of many investors, it is still struggling to emerge from its worst economic crisis in 60 years.

The economy grew about 4.5% last year, spurred by the export boom. But the improvement has not reached most citizens’ pocketbooks. Salaries, eroded by inflation, are still well below 1994 levels in real terms. Interest rates and joblessness remain high.

U.S. officials had been tipped off earlier that the repayment might come during the current quarter. The official notification came when Zedillo telephoned Clinton on Wednesday morning. The two leaders also agreed that Clinton would visit Mexico in the next few months, officials said.

Mexico will make the final loan payment today by wire transfer to the New York Federal Reserve Bank, officials said.

Sheridan reported from Mexico City and Pine from Washington.

* NO CHEERING YET: On the streets of Mexico’s cities, economic recovery is still a distant dream. D1