MEXICAN DEBT DEAL -----------------------------------------
Because of the continuing economic troubles in Mexico, repayment of that nation's debt is questionable at best. The Western banks that have lent money to Mexico want the country to repay as much of its loans as possible, and Mexico wants to avoid reneging on its obligations. Here is a simplified example of how the process would work:
1) Suppose a bank has lent $100 to Mexico.
2) Mexico entices the bank to cancel the loan by offering, in exchange, a Mexican government bond for a smaller amount. This new amount would be bid on by the bank -- perhaps 60 cents on the dollar.
3) Principal on the new bond would be due in 20 years, with interest payments due every six months at a rate of 1 5/8 percent over the benchmark London Interbank Offered Rate.
4) The principal -- though not the interest -- on the Mexican government bond is backed by collateral of U.S. Treasury "zero coupon" bonds. Mexico purchases these bonds at market rates from the Treasury -- in effect, lending money to Uncle Sam. The U.S. bonds are held in escrow so that holders of Mexican bonds can be assured of repayment.
5) Mexico now has reduced its $100 debt by 40 percent, to $60. The Western bank has a more secure, though smaller, loan at an attractive interest rate.