The postponement of Mexico's debt auction, where part of the country's old debt will be exchanged at a discount for new liabilities, does not signify the imaginative scheme's failure. But moving the auction from this Friday to Feb. 26 strongly underlines its limits and questions its viability as part of the solution to Mexico's enduring debt crisis.
In late December the Mexican government and Morgan Guaranty Trust of New York announced that Mexico would attempt to exchange up to $20 billion of its $104-billion foreign debt for $2 billion in 20-year U.S. Treasury-backed zero-coupon bonds, the present value of which is roughly $10 billion. The implicit discount that Mexico expected was therefore 50%, roughly the rate at which Mexican sovereign paper sells on the secondary market.
The reasoning behind the deal was that many of Mexico's creditors would willingly exchange, at a discount, wobbly Mexican debt for U.S.-backed, and thus theoretically more solid, securities. For its part, Mexico would reduce its outstanding debt, obtain direct U.S. government involvement in the debt crisis and achieve recognition of the fact that the real value of its debt was far lower than its book value. The whole arrangement seemed to represent a good deal for everyone, and was widely applauded.
In fact, the scheme was less favorable both to the banks and to Mexico than was immediately apparent. Even at a 50% discount Mexico's net yearly savings in interest payments, according to the Mexican finance minister, was in the $500-million range--not much, given annual debt-service outlays of nearly $11 billion. But the 50% discount was never really viable. At 35%, 30% or much less 25%--what the banks are really offering--the exchange became far less interesting for the country. This is particularly true when given the fact that Mexico was forced to set aside the $2 billion for the zero-coupon bonds up front: Pay now, save later.
Similarly, the banks discovered myriad reasons--financial, regulatory, fiscal--that made the deal less attractive than previously thought--or in any case made the arrangement acceptable at a 20% discount but not at 50%. Since neither the Mexican government nor its agent--Morgan Guaranty--wants an auction at which Mexico refuses bids that it considers too low, postponement was deemed the best solution while a way around many banks' reluctance is found.
It will be: An agreeable middle ground can be established without too much difficulty, given the relatively small amounts involved (by foreign-debt standards) and the importance of the players in question. But what emerges clearly is that the Mexico-Morgan scheme is not the path-breaking device that many considered it to be only weeks ago. More specifically perhaps, it is not in itself a way for debtor countries to capture the discount on their debts that the market has settled on. The new-debt-for-old solution is simply no substitute for real, long-term substantial debt relief.
Mexico needs the latter more than ever before. Its economy is plunging into a new recession--the gross national product may drop 2% this year, after virtually zero growth in 1987, and minus 4% growth in 1986--and it has funneled more than $50 billion into foreign-debt service since 1983. There is no way for the economy to grow with its present debt overhang, and no way for that debt to be reduced without some sort of unilateral action by Mexico to make its creditors more willing to listen to reason.
As the country's electoral campaign heats up and the arrival of a new government approaches (Mexico's likely next president, Carlos Salinas de Gortari, will take office on Dec. 1), pressure mounts for it to begin its term with a temporary suspension of payments. It will not be easy to resist.