In a move that could alleviate the Third World debt crisis, the Mexican government and the U.S. Treasury announced a novel financing plan under which Mexico would make it attractive for commercial banks to forgive some of their Mexican loans.
Under the plan, Mexico would entice U.S. and foreign banks to cancel billions of dollars worth of claims by offering, in exchange, smaller amounts of Mexican government bonds that would carry relatively attractive rates of interest. The Mexican bonds would be backed by collateral consisting of a special issue of U.S. government securities.
The Treasury, seeking to avoid any hint of a taxpayer bailout, emphasized that Mexico would pay for the U.S. securities at terms comparable to those available for private investors.
The development might prove to be a turning point in the debt crisis, some analysts said, because it provides a method for a troubled debtor nation to reduce its debt burden by billions of dollars without repudiating its obligations. Banks would participate in the plan voluntarily.
"It helps defuse the burgeoning crisis. It's a creative, cooperative initiative," said Richard Feinberg, vice president of the Overseas Development Council, a think tank specializing in international economic issues.
But other analysts cautioned that the plan's impact may be limited. For one thing, only part of Mexico's $77.5 billion in debt to banks -- perhaps $5 billion to $10 billion -- would be extinguished under the scheme.
"In no way is this intended to be a definitive solution to the foreign debt problem," the Mexican finance ministry said in a statement. The plan does, however, represent "a new stage" in reducing the impact of the foreign debt on Mexico's economic development, the ministry said.
Analysts also noted that the plan's success depends on the banks' response. A handful of banks have already indicated support, U.S. officials said, but for the plan to work a substantial number would have to participate at terms acceptable to Mexico.
One factor likely to dampen banks' interest would be the requirement that they write off a portion of their canceled loans, which would shrink their profits and capital.
Moreover, it is unclear whether the plan could be applied to other major debtors such as Brazil and Argentina, which have been experiencing economic and political problems so severe that many analysts fear they may default.
Neither Brazil nor Argentina has enough hard-currency reserves to purchase large amounts of U.S. Treasury securities.
Still, the announcement appears likely to create a more positive mood in the debt situation, which has been deteriorating recently amid threats by both debtors and banks to take action against each other.
"There's no perfect solution to the problem, but these kinds of things can chip away at it," said George Gould, undersecretary of the Treasury.
Sen. Bill Bradley (D-N.J.), who has been urging a fresh approach to the issue, said through a spokesman that he was "pleased" with the development, adding: "I hope this represents only a first step in a more broadly based plan to deal with the Latin American debt bomb."
The most constructive aspect of the plan, according to officials and analysts across a broad political spectrum, is that it offers a solution in which banks could agree to forgo the remote prospect of full repayment without being compelled to do so. This could help minimize the prospect of a confrontation in which banks would face disastrous, widespread defaults and Third World nations would face a cutoff of the bank credit they need to maintain vital trade.
The stocks of many big banks rose yesterday in response to the news. The announcement, said Feinberg, means that although banks would suffer a "short-term loss" by renouncing part of their claims on Mexico, "the remainder of their debt is more secure, and their books are put on a more realistic footing."
The plan doesn't appear to involve any U.S. taxpayer bailout, analysts agreed.
Under the Rube Goldberg-like plan, the U.S. government's role is limited to selling Treasury securities, known as "zero coupon bonds," to the Mexican government. These securities don't pay regular interest; instead, Mexico would make a relatively small one-time payment to the U.S. Treasury, about $2 billion, and receive $10 billion back after 20 years.
U.S. officials said that the terms under which the bonds would be sold to Mexico would be, if anything, slightly favorable to the Treasury to avoid any charges of taxpayers subsidizing a bailout.
The U.S. bonds would be used as collateral to guarantee payment of principal on a new issue of 20-year Mexican government bonds.
Mexico would then auction these bonds off to the foreign banks, but would only deal with banks that agreed to cancel their loans at ratios the Mexicans deemed favorable -- say, 50 cents or 60 cents on the dollar.
Mexican loans currently trade at a bit over half their face value in the private market.
To attract the banks, the new Mexican bonds would bear interest at 1 5/8 percent over the benchmark London Interbank Offered Rate (LIBOR).
Currently, Mexico pays 13/16 of a percentage point over LIBOR on its bank debt. Moreover, the bonds would be easier for banks to trade than loans are.
Initial bank reaction to the plan has been "encouraging," said Rodney S. Wagner, vice chairman of the credit policy committee of Morgan Guaranty Trust Co., which is serving as Mexico's agent.
"They're all being very polite in saying they like it," Wagner said. "The real test, of course, is when we come down to bidding" on the proposed Mexican bond issue.
The plan was hatched, according to Mexican officials and U.S. bankers, by Mexican debt negotiator Angel Gurria and senior officials of Morgan Guaranty.
The opportunity arose because Mexico, despite its serious, continuing economic problems, has piled up more than $10 billion in reserves of dollars and other "hard" currencies. This reserve hoard, which grew after Mexico undertook some steps to streamline its economy, might be put to good use, the Morgan bankers figured.
Morgan's Wagner said he traveled to Mexico City in August to talk with Gurria and other top Mexican officials. The Morgan bankers, representing the Mexican government, then traveled to Washington in October to present the plan to Treasury Secretary James A. Baker III, who liked the concept. Baker, Gould and other Treasury officials helped design the special zero-coupon bond issue, which took a number of weeks.
Special correspondent William A. Orme Jr. in Mexico City contributed to this report.