Relations between Mexico and its international lenders are worsening at a time when Mexico badly needs new money to handle its $99-billion foreign debt.
Talks between Mexico and the International Monetary Fund are at an impasse over the country's inability or unwillingness to cut government spending, a key condition for new IMF funds. And commercial bankers, who hold nearly 75% of Mexico's debt, are playing hardball, demanding that Mexico accept a stringent IMF economic program before they will even resume talking to the debt-ridden nation.
The world watches with growing concern because a Mexican default or repayment moratorium would threaten the health of hundreds of major banks in the United States, Europe and Japan. Even if Mexico and the IMF reach an accord soon, bankers say, the country's negotiations with bank creditors are expected to be bitter and protracted.
"It's going to be a long, hot summer," predicted Samuel H. Armacost, president and chief executive of Bank of America, which holds $2.7 billion in loans to Mexico.
Mexico also is seen as a trend-setter among developing nations, which together owe banks and international agencies worldwide nearly $1 trillion. Bankers worry that a Mexican refusal to make debt payments could inspire scores of other nations with debt problems to join together and declare a debt "holiday."
Mexico owes commercial banks around the world about $73 billion; $26 billion of that is owed to U.S. banks, most of it to the nation's 10 largest banks. Another $26 billion is owed to governments and multilateral agencies such as the IMF and World Bank.
Bankers, economists and government officials in Mexico and the United States are publicly cautious and privately pessimistic about prospects for an accord leading to significant economic reforms in Mexico and a resumption of voluntary new lending by the banks.
"It's hard to be optimistic about Mexico right now," said Carl Weinberg, senior economist at Shearson Lehman Bros., a Wall Street investment house. "They need new money and it's not clear where they're going to get it. The situation starts off bad and just seems to get worse the longer they leave it (unresolved)."
Mexican President Miguel de la Madrid finds himself in both political and economic binds. To maintain domestic support, he has to project the image of a tough, nationalistic negotiator. A Mexican politician seen as knuckling under to the IMF and international bankers would be doomed.
But De la Madrid also knows that his nation's economic situation is hopeless without new money from foreign lenders. Estimates of the new funds required this year range from $4 billion to nearly $10 billion.
The IMF demands that Mexico reduce its budget deficit, which is currently running at about 10% of gross domestic product, to the previously agreed target of 4.5%. That is viewed as a near-impossibility because of the plunge in the price of oil, which provides 70% of Mexico's export earnings and 50% of government revenue.
Slash Government Spending
Attempts to slash government spending, which already has been cut deeply under previous IMF plans, run into economic and political roadblocks. About half of the budget is dedicated to servicing debt, both foreign and domestic, and therefore cannot be reduced.
Cuts in the other half means reducing the size of the bureaucracy or selling off state-owned industries, painful steps because either measure slices into support for De la Madrid's Revolutionary Institutional Party (PRI), whose power is heavily dependent on government-sponsored trade and public-worker unions.
De la Madrid warned last month that "the difficulty in covering the debt service makes for a climate of uncertainty that discourages productive activities and might cause social instability. . . . If the present situation continues, there is no possible solution."
He added that bankers were in large measure responsible for Mexico's problems and would have to make financial sacrifices to solve them. Such statements are read as an implied threat to unilaterally limit interest payments to a percentage of export earnings, as Peru did last year.
Many bankers and diplomats discount much of the Mexican president's rhetoric as playing to the domestic gallery. But some bankers believe that Mexico's lack of progress with the IMF, falling oil prices and dwindling foreign exchange reserves may well add up to a replay of August, 1982, when Mexico announced that it could not repay its loans and touched off the current debt crisis.
"I don't see a new money package being put together in the near term," one East Coast banker said. "Without such a package, the country will run out of money in September or October. I think it's going to go to the brink."