The prospects that debt-laden Mexico and the International Monetary Fund will reach an agreement soon were enhanced as a result of Federal Reserve Board Chairman Paul A. Volcker's secret trip to Mexico City Monday, banking sources said yesterday.
If the IMF, the international lender of last resort, and Mexico fail to reach a lending agreement within the next few weeks, it is likely that, before summer's end, Mexico would have to suspend some or all the payments it must make on its $98 billion in foreign debts, a move that would shake the international financial system.
Mexico and the IMF are trying to agree on an economic program that will allow the IMF and the World Bank to lend Mexico several billion dollars and will lay the groundwork for several billion dollars in new commercial bank loans.
Commercial banks, which Mexico owes about $70 billion, have said they will not make new loans to the cash-strapped oil-exporting country unless Mexico undertakes economic policies acceptable to the IMF.
"Things are looking better than they were last week," an international financial source familiar with the talks between Mexican officials and Volcker said.
The source said the talks between the IMF and Mexico have reached a critical point. "When that happens, it is always helpful to have a friend to talk" things over with, the source said of Volcker's visit to Mexico.
There had been growing pressure on Mexican President Miguel de la Madrid to break with the IMF -- often painted as a tool of "economic imperialism" by the left and the nationalist right -- and to limit interest payments to commercial banks and other creditors. "People who wanted a more unorthodox solution for the moment have lost," according to one monetary source.
But another source noted that, while Volcker's mediation has made an agreement more likely, there is always the possibility that the two sides will fail to agree and precipitate a new round of confrontations in the Latin American debt crisis that Mexico touched off nearly four years ago when it ran out of money to pay its debts.
The Mexican economy has been decimated by a 50 percent plunge in the price of oil, and Mexico needs to borrow as much as $6 billion to $7 billion this year to enable it to pay its interest and to maintain a minimal level of imports to support its domestic economy. Its interest bill is about $750 million a month.
The nub of the dispute between the IMF and Mexico is the size of the debtor nation's budget deficit. Mexican officials say they cannot cut federal spending any more -- subsidies on such staples as bread and tortillas have been eliminated or severely reduced.
They say the decline in oil prices not only has hit hard at the amount of dollars Mexico can earn from exports, but also has cut domestic tax revenue by 25 percent.
Assistant Treasury Secretary David Mulford said yesterday before a Senate Foreign Relations subcommittee that there was no immediate prospect of a Mexican default, but that, if Mexico didn't get new funds at some point in the future, it could run out of money.