Mexico's liquidity crisis, as President Jos,e Lopez Portillo has pointed out in an address to U.S. border governors, could be severely damaging to both Mexico and the United States. However, if we respond to it with statesmanship and foresight, Mexico's crisis could provide an opportunity for cooperation between the two neighbors marking the beginning of a new era of "managed interdependence."
Fortunately, the Mexican president himself took the initative in calling for the Reagan administration to study "some system of linking our economies." The potential for trade, investment, employment and technological links between the two countries overshadows the value of financial obligations of Mexico to U.S. and foreign banks. This opportunity is one that might well be explored, together with further U.S. support for the peso, between now and the inauguration of President Miguel de la Madrid on Dec. 1.
Not since the sterling crisis that beset England after World War II has the United States faced so great a challenge to help an ally in time of temporary financial need. In neither case was there a question of solvency of the country. On the one hand, Britain in 1950 owed $71 billion (in 1982 dollars) to foreign creditors. This debt was offset by claims against foreign borrowers whose future growth was the collateral.
In the Mexican case, its debt of around $80 billion is secured by its own growth potential, which is considerably above the yields Britain might have expected on its portfolio in 1950. Mexico's gross domestic product in 1981 of about $150 billion dollars compares favorably with Britain's GDP of $135 billion in 1950 (expressed in today's dollars).
In both cases, support of the troubled partner was consistent with a high order of U.S. self-interest, since sterling and peso obligations were held by U.S. citizens and institutions that would have to be bailed out even if the partners were allowed to default. Moreover the U.S. economy depends on an unobstructed flow of trade and investment that would become impossible if such a crisis were ignored.
In both cases, the countries involved were undergoing sharp political and structural changes, including more nationalization in Britain under the Labor government than in Mexico under Lopez Portillo.
In both cases, currencies were frozen, and it could be argued that the blocking of sterling balances worked a much greater hardship on creditor countries than the imposition of exchange controls on the peso, since the pound as a major international currency was an important source of working capital.
Mexico's debt, much of it short-term, is in part the consequence of expansionary domestic policies, inflation and a peso that was overvalued through February 1982. But some of the responsiblity for the crisis also rests with the state of the international economy. The United States is at least indirectly responsible for high real interest rates and economic recession which in turn has cut into Mexico's export revenues.
At present, Mexico needs a cushion for the peso to help restore confidence in its currency. This would permit dollars to flow back and debt to be rolled over. Despite the magnitude of its short-term debt, banks have agreed in principle to a waiting period, provided interest can be paid. But there is a severe dollar shortage that makes even the payment of interest problematic if essential imports are to be maintained.
The size of the gap is debatable, but given the unstable character of an extreme liquidity crisis and continued capital flight, what is needed is not a direct injection of dollars but standby credit of major proportions. This could be done through an agreement with the Federal Reserve and the Treasury to stabilize the peso at a reasonable rate or through a quickly achieved agreement with the IMF to provide a cushion of several billion dollars.
Whatever the outcome, the fundamental issue is between the United States and Mexico, given the immense opportunities of the two countries for future cooperation, opportunities that will be enhanced, rather than limited, by Mexico's attempt to find a national development path that provides security for all of its citizens rather than for only a privileged few.
It may be time to convene a "mini- Bretton Woods" conference in which such issues could be discussed, in the context of the critical international situation that the Mexican crisis illuminates.