Mexico has been warning the United States for the past week that it can no longer meet its debt repayment schedules. At the beginning of the year, with Mexican light oil selling for $26 a barrel, the debts were manageable. Currently, with the price down by one-third, the Mexicans say that they are not. So far the lenders have been providing Mexico with new loans to help them service the old loans. But the Mexican government is now saying that with the price of oil falling, that won't work any longer. It is right.
But there is no consensus regarding what comes next. The lenders are mostly commercial banks in this country, Western Europe and Japan. The size of the concessions that can be extracted from them without threatening their own stability is limited. If greater concessions are necessary, they will presumably have to come from the governments of the industrial countries -- chiefly the United States, with its enormous interest in Mexico's recovery and growth.
But before the discussion reaches that point, Mexico will have to talk about its own further contributions to a solution. Throughout its long struggle with its huge debts, the Mexican government has shown notable steadiness and courage. But it has made a couple of mistakes.
A little over a year ago, things were going so well that it thought it could afford to reflate the economy in traditional preparation for last summer's state elections. The government overdid it, inflation rates took off again and a new surge of capital flight commenced.
Much of Mexico's foreign debt is the result of capital flight over the years, and no solution to the debt crisis is likely to work very well as long as wealthy Mexicans continue to move their money out of the country as fast as they make it. Mexico's industrial economy is highly protected from world competition and does not need to invest much or reach any very high level of efficiency to make money. If Mexico were to open its industry to the cold winds of competition, the rules of the game would change. Life would become less comfortable for the present owners and managers, but new opportunities would arise -- including opportunities to export. Mexico should have begun moving in that direction long ago. As long as oil revenues were rising, that kind of unappealing reform seemed unnecessary. But now oil revenues are falling.
All the elements of a solution are painful: some losses for the banks, some contribution by the United States government, extensive industrial change in Mexico. The American interest is clearly in a durable agreement. But the nature of it will depend at least as much on Mexico as on its creditors.