Federal Reserve Board Chairman Paul A. Volcker said yesterday that Tuesday's sudden dismissal of Mexican Finance Minister Jesus Silva Herzog probably does not mean Mexico will reduce payments on its $98 billion of foreign debts.
But Volcker, testifying before the House Foreign Affairs Committee, said that Mexico and other Latin American nations are growing weary of their four-year-old struggle to pay their foreign debts.
How Mexico and its lenders deal with the severe crisis the country faces as a result of the plunge in oil prices will influence how other debtor nations such as Argentina and Brazil reform their economies while paying their debts.
Volcker said that the risks of a major debtor nation default, which could trigger a worldwide financial collapse, diminished during the last four years. But he said the possibility of a collapse remains, and he deflected hypothetical questions about how it might come about.
The four-year-old Latin American debt crisis, which began in Mexico, again is focused on that country.
Silva Herzog was the architect of Mexico's debt strategy from the very beginning. It emphasized cooperation with international lenders and belt-tightening at home. After a severe recession in 1982 and 1983, Silva Herzog's strategy appeared to pay off. In 1984 and 1985, the Mexican economy resumed growing, and lenders rewarded the country by easing repayment terms and providing new funds.
But the collapse in oil prices last January hit Mexico hard. The billions of dollars of interest that Mexico pays each year to commercial banks -- which hold about $70 billion of the country's foreign debts -- has become a major domestic political issue.
Some members of President Miguel de la Madrid's cabinet want a more confrontational approach to dealing with the banks and with the International Monetary Fund, the multinational lending agency of last resort that negotiates changes in economic policies with debtor nations. In recent months, some Mexican political figures had suggested that the country should consider unilateral actions, such as reducing interest payments to ease the financial burden created by the decline in oil prices.
Volcker said that Silva Herzog was caught in the middle of the domestic debate over the debt strategy, but said "there is nothing that I know about the background of the successor to Silva Herzog that would indicate a sharp change in policy."
Gustavo Petricioli, who was named finance minister immediately after Silva Herzog's ouster, followed a career path similar to his predecessor's. Petricioli studied at Yale, worked for the Bank of Mexico, the finance ministry and, since 1982, has been director of Nacional Financiera, the government's development bank.
Volcker said that Mexico's problems are serious and that the country needs outside financing in addition to making internal adjustments to compensate for the loss of billions of dollars of oil revenue.
"A lot is at stake, not just because Mexico is a large country immediately on our border, with very large debts," the Federal Reserve chairman said. "Success in providing a base for new hope among the Mexican people, in laying the groundwork for renewed growth next year, and in maintaining creditworthiness and access to world financial markets will encourage other countries in their efforts.
"If, in contrast, we collectively falter in that effort, the progress of others will be undermined."
Volcker made an unannounced trip to Mexico last week in an attempt to revive faltering talks between Mexico and the IMF. Those talks apparently were stalemated over the size of the federal deficit. Mexico argued for a bigger deficit than the IMF wanted, stressing that tax revenue will fall 25 percent this year as a result of oil prices. The nation could not cut spending enough to bring the budget deficit down to the level the IMF desired, they said.
Volcker said that the international debt crisis has reached something of a watershed. It is clear, he said, that countries must resume economic growth. But he added that austerity-weary countries also must take painful economic reforms that will take a long time to pay off.
He said industrial nations must keep their markets open and take steps to ensure that the world economy continues to grow -- otherwise debtor nations may find it politically more expedient to fail to make long-run economic policy changes, such as opening up inefficient industries to foreign competition, encouraging foreign investment and selling off state enterprises.