By Ann Devroy and Clay Chandler
Washington Post Staff Writers
Wednesday, February 1, 1995

President Clinton yesterday abandoned his proposed $40 billion loan guarantee package for Mexico in the face of unrelenting congressional opposition, and announced he would instead act on his own authority to offer Mexico $20 billion in U.S. government short-term loans and loan guarantees to stabilize the peso.

The U.S. initiative, a major policy shift, included large new pledges of support for Mexico from international financial institutions that will raise the total global commitment to Mexico to more than $49 billion.

Clinton decided to abandon the effort to get congressional approval of loan guarantees late Monday night after being informed by Republican leaders that success was nearly impossible and would take two weeks or more of significant presidential lobbying.

"We cannot risk further delay," Clinton said yesterday in announcing his decision after a White House meeting with congressional leaders. He argued that the financial situation in Mexico was so dire that executive action was needed.

Speaking to a group of Democrats at a fund-raiser in Boston last night, Clinton said, "I don't blame the congressmen for wanting to ask questions, I don't blame them for not wanting to vote on this. It's a hard sell."

But he said his position would be vindicated once its merits became understood.

The new initiative was applauded in Mexico and on Wall Street, because it eliminated the risk Congress would reject the rescue package and trigger a financial crisis in Mexico and possibly elsewhere. The peso and Mexican stocks soared in value yesterday, reversing steep falls on Monday, and in New York the Dow Jones industrial average rose modestly in heavy trading.

Reflecting how politically charged the issue has become since Clinton and congressional leaders announced the original package Jan. 13, the four top leaders in Congress yesterday joined with the president in a joint statement of agreement on the need for the new policy.

The $20 billion Washington will now make available to Mexico comes from the federal Exchange Stabilization Fund, set up in the 1930s under control of the president and treasury secretary, and usually is used to intervene in foreign currency markets to support the dollar.

The money will be provided as short-term loans to Mexico, and as longer-term loan guarantees. The Treasury said Mexico had agreed to pledge oil revenues as collateral to guarantee repayment, and that Mexico promised to pursue economic austerity, in its interest-rate and government spending policies, under the plan.

Treasury Secretary Robert E. Rubin, who spearheaded the administration's efforts to assemble the original package and get it through a balky and then openly rebellious Congress, said the "likelihood is very high" the announcement would avert a financial catastrophe in Mexico.

The original $40 billion loan guarantee package was Clinton's first major effort to negotiate a difficult and politically charged issue with the new Congress under control of Republicans. The White House had expected support by leaders of both parties would produce a quick piece of legislation and fast approval.

But the legislation became a forum in which dozens of members wished to air old and new political grievances. Almost from the outset, congressional leaders and their membership feared bailing out Mexico, as it was commonly described, would be hugely unpopular with the public, difficult to sell under any situation and ripe for political gamesmanship.

With no firm control over his party, Clinton had to turn to Republicans, who could not rise above their political suspicion that Democrats would flee the package and they would bear political blame.

House Banking and Financial Services Chairman Jim Leach (R-Iowa), who had worked closely with the White House to fashion legislation and get its approval, offered a nonpartisan lament. "The tenor of these times, the lack of comity, partisanship and suspicion made it difficult" to get an agreement, he said.

Rep. Bill Richardson (N.M.), a Democratic leader assigned to round up votes, said of the Democrats, "We didn't have the votes." Echoing a sentiment that was common throughout Congress which now cannot be blamed for bailing Mexico out, he said, "Members feel a sigh of relief that they won't have to take a tough vote."

Senior officials who briefed reporters on the new effort said it essentially involves using the Exchange Stabilization Fund and the Federal Reserve System in an unprecedented effort to restructure Mexico's short-term debt into longer-term debt. The goal is to stabilize its peso and get it over what the administration describes as a short-term liquidity problem, not a fundamental economic problem.

Clinton suggested last night that Mexican policies, which have been criticized by some economists for using foreign investments to finance a consumption boom, caused some of the problems. "Those folks got into a little economic trouble, but they didn't deserve as much as they got because a lot of the international financial markets today are controlled by a hundred thousand different forces, and when a speculative fervor starts in one direction, sometimes it's hard for it to stop."

Central to the U.S. effort to stop further erosion in Mexico's financial position was the agreement by the International Monetary Fund to add $10 billion to the effort to stanch Mexico's economic crisis, raising its commitment to about $17.5 billion. Another international financial institution, the Swiss-based Bank for International Settlements, agreed to double its contribution to $10 billion, and $2 billion more has been pledged by Latin American nations and Canada.

Congressional critics had complained the United States was being asked to act alone in helping Mexico.

To try to avoid political gamesmanship over the new initiative, Clinton issued a joint statement with House Speaker Newt Gingrich (R-Ga.), Senate Majority Leader Robert J. Dole (R-Kan.), House Minority Leader Richard A. Gephardt (D-Mo.) and Senate Minority Leader Thomas A. Daschle (D-S.D.). They said move was needed to "ensure orderly exchange arrangements and a stable system of exchange rates" and that under law, the president "has full authority to provide this assistance."

The administration portrayed Clinton's decision as an unmistakable example of presidential leadership in which Clinton took on all the political risk in the interest of national and international stability. Some analysts agreed that Clinton, who rarely moves unilaterally in the foreign economic policy field, had acted strongly.

But they also argued the move was a sign of weakness because it resulted from his inability to rally the country and his party behind the original package. Wayne Berman, a former senior Commerce Department official involved in helping Republicans rally votes, said yesterday, "I applaud him. He has finally understood that in foreign policy, the president can act on his own and he has done so. But it also reveals his fundamental weakness now. He could not muster 80 votes on the House side or 25 on the Senate side of his own party."

Among the conditions put in place to ensure Mexican repayment, officials said, were a requirement its national oil company inform its buyers to deposit certain portions of their payments into a Federal Reserve Bank fund as collateral for the loans. Mexico also will pay a loan origination fee of between 3 percent and 12 percent, depending on the size of the loan.

The option of going directly to Mexico's aid by tapping the Exchange Stabilization Fund and international lenders was among a number of possibilities considered at the early stages of the peso crisis, and one pushed by several congressional leaders, administration officials said yesterday.

But Clinton and his top economic advisers decided initially to seek congressional approval for a U.S. rescue package because they had little confidence the IMF or other industrialized nations would help. The belief was that the rest of the world saw Mexico as essentially a U.S. problem, Rubin said.

Also, the initial signals from leaderships of both parties in Congress led the administration to believe approval of the rescue package could be reached relatively quickly.

But last week, as the fight in Congress bogged down, Treasury officials began scrambling to firm up an alternate plan. A series of White House meetings stretched from Saturday to Monday night before Clinton decided, after 11 p.m., to throw in the towel.

The trouble with Congress spelled big risks for Mexico. On financial markets, speculation ran high that the Mexican government was close to defaulting on short-term bonds -- a very rare event that could have sparked an international financial panic.

Rubin, with Undersecretary for International Affairs Lawrence H. Summers, began exhaustive telephone consultations with foreign financial officials to get extra support. Officials remained at Treasury until nearly 5 a.m. yesterday, conducting a marathon effort to drum up added support from the IMF. Only at 7 a.m. did a haggard Summers receive assurances that IMF was nearing consensus on the increase. The IMF announced approval yesterday, although directors meet today to give a final okay.

In Congress, some members, particularly Republicans in the large freshman class, said they did not like the unilateral action any more than they did the guarantees. Freshman Rep. Robert L. Barr Jr. (R-Ga.) said Clinton's action amounted to "circumventing Congress, which I resent."

But most members were supportive. Sen. Robert F. Bennett (R-Utah), Dole's point man on the earlier peso deal, said the new proposal "enjoys greater support."

Staff writers Kenneth J. Cooper and Helen Dewar contributed to this report.