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A Breakthrough Deal for Mexico Finance : Payment on U.S. loan would carry wide range of benefits

June 23, 1996

In a smart move that shows growing confidence, Mexico has announced plans to repay, more than two years early, $4.7 billion of a $10.5-billion U.S. loan. The money would come from a pending $3-billion loan from international investors and a proposed sale of $1.7 billion in government bonds and notes. Both are expected to go through.

The deal makes sense financially and marks Mexico's return to international financial circles, a development that seemed impossible only 18 months ago. By moving this debt from the U.S. Treasury to the international markets, Mexico expects to get a better rate and to stretch out its repayment schedule.

Politically, the move gives the Clinton administration a pat on the back. President Clinton helped Mexico with the loan at a time of need, and now, by shifting a large part of the debt, the Mexicans would dampen an issue that could be used against him in his campaign for reelection. There was considerable opposition to the 1995 loan among U.S. politicians.

Furthermore, the move would ease pressure on the bilateral relationship by separating the issue of debt from the political problem of what some have called Mexican dependency on the United States.

In effect, the deal would make a third payment on the bailout loan. The package worked out by the U.S. Treasury after the disastrous peso devaluation of December 1994 opened a $20-billion line of credit. Mexico drew $13.5 billion and, earlier this year, made payments of $3 billion on principal and $750 million on interest.

Domestically--and this is patriotically important--the repayment would allow Mexico to regain control of some of the mortgaged revenues of Pemex, the national oil company, that were pledged as collateral.

Despite the advantages offered by the refinancing, however, the deal would not deliver the economic relief that Mexicans have sought since the economy went sour in the early 1980s; that will take long years. Even so, President Ernesto Zedillo may have bought political time to set reforms in place. There is a sense in Mexico that the transaction means the nation's economic fortune is starting to rebound after having touched bottom.

It may produce some support for Zedillo's necessary but unpopular economic liberalization program. He is betting, once again, that Mexico has only one viable route through the shoals of today's global economy and that he knows how to navigate it.

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