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Help Through the Aftershocks

February 16, 1986

The Reagan Administration is preparing another financial rescue package for Mexico, whose already serious economic problems have been exacerbated by the plunge in world oil prices. But this time, Mexico is in such deep trouble that it will take more than a plan that will just buy time until the next crisis comes along.

The latest surge of concern over Mexico's economic health began with the two devastating earthquakes that hit the country in September, putting new financial burdens on a government that already carried a foreign debt of more than $96 billion. Even then the international bankers who loaned Mexico almost 80% of that amount realized that they would have to lend the government of President Miguel de la Madrid more money just to cover the interest on what it already owed. At the end of 1985, Mexican officials estimated that they would need $4 billion in new loans to cover Mexico's short-term debt obligations for 1986--a daunting $10 billion.

Now it appears even those estimates were overly optimistic. Oil is Mexico's main export, the source of more than 70% of its foreign exchange. The expected $4 billion shortfall was based on an average world price for oil of $23 per barrel. Last week the world price for oil dipped below $16 per barrel, and experts warn that it may eventually drop to $15. Put in the starkest terms, for every dollar the price of oil drops, Mexico loses more than a half billion dollars. Thus Mexico's revenues will fall short this year between $6 billion and $9 billion. Those are the numbers with which the Administration is preparing its rescue package.

What can be done for Mexico? One traditional strategy that must be passed up this time is austerity. There is nothing left to squeeze out of the Mexican economy, now that the value of the peso has plummeted to 500 per dollar from 200 per dollar two years ago. For the De la Madrid government to cut back any more on its social spending while Mexico's unemployment rate is hovering near 40% would be to invite political unrest. Another approach to austerity is to halt government spending for capital projects, but that could do permanent damage to Mexico's economy.

One alternative to austerity would be a foreign-investment plan, like the one recently proposed by Treasury Secretary James A. Baker III. The plan envisions private banks in this country, Western Europe and Japan creating a special loan fund that would be made available to borrowers who were willing to invest in Mexico's private sector. The existence of such a fund might encourage the Mexican government to put more state-owned enterprises up for sale, and also persuade Mexican officials to lower legal barriers against foreign investment in that country. The De la Madrid administration has already taken some cautious steps towards opening Mexico's economy up, and it must be encouraged to continue along that path. Investing in Mexico is not as great a gamble as it might seem. Whatever the country's current problems, no one doubts that Mexico has the resources, infrastructure and population to work its way back to financial strength given enough time and capital.

The Administration should also press the banks to renegotiate Mexico's short-term debts, rescheduling the payments into the next century, if necessary. The banks should also be asked to consider putting a ceiling on Mexico's interest payments. This would help restore public confidence inside Mexico, showing the Mexican people that their courageous effort to live with austerity and sacrifice for the last three years is appreciated.

Finally, the Administration could help Mexico's cash flow dramatically with a large purchase of Mexican oil for this nation's strategic reserve. A $1 billion U.S. purchase of Mexican oil helped the De la Madrid government through the first phase of the debt crisis in August, 1982. At least that much, and possibly more, should be spent now. Presently at 500 million barrels of oil, the strategic reserve is far below the goal of 750 million barrels set during the last Arab oil embargo.

At a time of cutbacks in domestic spending and a growing budget deficit, many people in Washington and elsewhere will be dubious about the United States going out of its way to help Mexico. They should remember that Mexico's 70 million people share a 2,000-mile border with us--a border that is remarkably open and unguarded, a situation unique in the world. This country has been fortunate in recent years to have as its biggest neighbor, and third-largest trading partner, a nation that has been a model of stability for Latin America. Anything that helps insure Mexico's continued stability is a sound investment in our own national security.

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