Mexico told its major bank lenders on May 31 that it was doing so well financially that it did not need their money.
On the same date, bankers and the International Monetary Fund told Brazil it was doing so badly that it could not have some $1.1 billion it was supposed to get May 31.
So far, Mexico's economic adjustment program appears to be working far better than Brazil's.
"I've always felt that things were never as bad in Mexico as we were led to believe," said a major U.S. banker. "Nor did I ever believe that things were as good in Brazil as the Brazilians wanted us to believe last fall." That was before Brazil followed Mexico and told its lenders it could not repay its debts on time and went to the IMF for assistance.
But bankers say Mexico's relative success with its adjustment program--designed to reduce the nation's need to borrow from abroad--can be attributed to the strength of its economy until last August.
Mexico roared ahead as a result of its oil exports until the petroleum bubble burst in 1982. Brazil, by contrast, felt the effects of the worldwide recession as far back as 1980.
"You can only extract so much sacrifice from your people after an extended recession. Mexico was able to take some quick steps--like cutting imports--that Brazil had already taken," said a top economist at a major U.S. bank.
Both Mexico and Brazil are the world's biggest international debtors, with nearly $90 billion in foreign loans each. They lead the list of nations--among them Argentina, Peru, and Chile--that found themselves unable to repay their foreign debts.
All these nations have entered into agreements with the IMF to take harsh internal belt-tightening steps to reduce their need to borrow. In return, the IMF and the banks loaned the countries more money and the bankers eased the repayment terms on maturing debts.
But the effects of the agreements on the domestic economies can be devastating.
They require governments to sharply reduce their subsidies to consumers and industries to reduce public sector deficits. They require sharp currency devaluations to make imports more expensive and exports cheaper so that nations can rebuild their currency reserves.
The result of those moves--and others--is to trigger recessions, high inflation and a lower standard of living for the vast numbers of impoverished citizens and the relatively small middle class.
"Brazil just isn't going to be able to take it, I don't think," said a major banker who is sympathetic to that nation's difficulties in swallowing the IMF medicine. Brazil announced a new series of austerity measures last month, but economists say that unless the government stops the practice of adjusting wages to the rate of inflation it will never be able to break the inflationary cycle that continues to push up the public sector's need to borrow.
At the same time, the devaluations themselves add to inflation and increase the internal pressure on the Brazilian government to keep wage increases in step with price increases.
Three years of recession and inflation have eroded the willingness of Brazilians to sacrifice any more. Labor unrest in Brazil has been growing. This week government oil workers began agitating against the latest austerity measures.
The year-old Mexican recession--triggered by large devalutions of the peso and cuts in government subsidies--so reduced imports in May that the country ran a $2 billion trade surplus and was able to forego borrowing $1.1 billion that its bankers were willing to lend. Although oil prices are down sharply from their peak, petroleum exports still provide a steady if reduced source of income to Mexico.
Still, Mexican inflation is running close to 100 percent--it was less than 30 percent in 1980 and 1981--and the country took additional belt-tightening steps this week that will further reduce its public sector deficits but will add to inflation and to the burdens of the poorest of its people.
Mexico reduced subsidies on tortillas and bread. Corn tortillas now cost about 5 cents a pound, up from 3 cents, while white bread doubled in price.
Mexican Finance Minister Jesus Silva Herzog said in an interview several months ago that Mexico can run a stringent, recession-causing adjustment program no longer than two more years without internal upheavals.
A U.S. banker agreed. He noted that Brazil's self-imposed adjustment program began three years ago. "Brazil's string may be totally unwound," he said.
He said Brazil needs easier terms than it agreed to with the IMF. At the same time, he said, it will be politically difficult, if not impossible, for the IMF and the banks to ease the conditions imposed on Brazil without granting the same concessions to other countries.