Congressional investigators yesterday charged the Treasury Department with giving Mexico a $192 million subsidy by selling that country underpriced bonds to help it reduce its foreign debt.
The criticism by the General Accounting Office could influence the current negotiations between Venezuela and its private bank creditors, since the South American country is expected to request Treasury support for a debt reduction package similar to that obtained by Mexico.
Allan Mendelowitz, a GAO director, told the House Banking Committee that while Treasury Secretary Nicholas F. Brady had the legal authority to provide Mexico with the subsidy, his decision was "neither appropriate nor good public policy."
Rep. Henry Gonzalez (D-Tex.), the panel chairman, called the Treasury measure a circumvention of the congressional appropriations process and emphasized that only Congress has "the constitutional prerogative and responsibility" for appropriating public money and allocating it to subsidize foreign governments.
David Mulford, Treasury undersecretary for international affairs, defended Brady's Jan. 5 decision claiming that zero-coupon 30-year bonds were sold to Mexico at an interest rate of 8.05 percent, higher than the 7.92 percent the Treasury was paying at the time to raise funds for the U.S. government. "There was no subsidy," he said.
Mendelowitz called Mulford's argument "disingenuous" and noted that if the Treasury's intention at the time had been to obtain money for the U.S. government, it could have issued shorter-term securities with even lower interest rates.
As a result of Brady's January decision, on March 28 the Treasury sold Mexico $30.2 billion in zero-coupon bonds for $2.99 billion as part of the reduction of that country's commercial bank debt under Brady's 1989 initiative to cut the debt burden of developing nations.
The bonds were used partially to guarantee the restructured debt. "Zeros," as they are commonly called, pay interest and principal in one payment at maturity and thus are sold at deep discount from face value -- the higher the interest rate, the lower the initial cash cost.
According to the GAO, Treasury had two interest rate benchmark options to price the zeros: the market for "strips," and the market for 30-year Treasury coupon bonds. The strip market was created by dealers who separate a Treasury bond's payments of interest from payments of principal and sell rights to these payments separately.
Treasury chose to base the zeros' price on the interest rate of the 30-year bond market, providing Mexico with a $192 million "effective subsidy" in a lower price for the bonds, the GAO said.