MEXICO'S EVOLVING DEBT STRATEGY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00990R000200060001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 23, 2016
• Document Release Date: July 23, 2013
• Sequence Number: 1
• Publication Date: September 12, 1988
• Content Type: MISC

Declassified in Part - Sanitized Copy Approved for Release 2013/07/23: CIA-RDP04T00990R000200060001-395X1
Central Intelligence Agency
Washington, D. C.20505
DIRECTORATE OF INTELLIGENCE
12 September 1988
MEXICO'S EVOLVING DEBT STRATEGY
Summary
Mexico's President-elect, Carlos Salinas, has sent a
strong signal that his administration will take a tougher
stance with the international banking community when he
takes over in December. Blaming the debt burden for
stunting economic growth, he has vowed to drive a hard
bargain with bankers in debt negotiations and has warned
that he will suspend interest payments if the alternative is
economic stagnation. Mexican officials probably hope the
strong showing in the July elections by the leftist
opposition--which favors a suspension of debt service
payments--will give them some leverage with bankers. We
doubt, however, that Salinas would follow through on threats
of a moratorium given Brazil's failed attempt to force
bankers to forgive a portion of their debt and the risk of
losing short-term trade credits.
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This typescript was prepared by Office of
African and Latin American Analysis. Questions and comments
may be directed to the Chief, Middle America-Cuba Division,
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A Drain on the Economy
Repaying foreign debt remains a Significant impediment
to Mexico's economic growth despite several rounds of debt
restructuring since 1983 and concessions on the interest
rate charged by commercial banks. Interest payments on the
foreign debt as a share of GDP have doUbled since the early
1970s to the equivalent of almost 6 percent of GDP. Public
sector debt service payments still consume more than one-
third of the foreign exchange earned from exports of goods
and services each year.
Mexican officials argue that bankers' refusal to lend
Mexico new money has made the country a net exporter of
capital to industrialized countries. In repaying principal
and interest, Mexico has transferred abroad $44 billion in
net resources since its initial debt crisis, equal to almost
5 percent of its GDP and more than one-fourth of its goods
and services exports. In order to generate sufficient
foreign exchange, the country has reduced imports and
produced trade surpluses totaling $56 billion over the last
six years, eqUivalent to 5.9 percent of its GDP for that
period.
Debt Swap Schemes
Past efforts to lighten the foreign debt service burden
have borne little fruit. Mexico's debt-for-bond swap
succeeded in exchanging only $3.7 billion in debt for $2.6
billion in bonds, canceling just $1 billion of Mexico's $100
billion foreign debt and shaving off less than $100 million
in interest payments from the $8 billion annual bill.
Before their suspension last year, exchanges of Mexican
public sector debt for equity in Mexican companies also had
only a limited impact on outstanding debt, reducing it by
$1.8 billion. Secretary of Programing and Budget Pedro Aspe
estimates the creation of pesos in exchange for the loans
added 30 percentage points to the inflation rate because it
substantially increased Mexico's narrow money supply. (See
Appendix).
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Salinas Plans
Frustration over disappointing results from the debt-
for-bond swaps and growing Social discontent over
deteriorating living standards have led to harsher public
statements by Mexican officials on debt repayments. Even
before the ruling party suffered unprecedented electoral
losses in July, government officials were threatening that
they would unilaterally cut Meitico's interest payments if
bankers refused to provide easier terms or to participate in
new financial schemes. Although SalinaS currently prefers
to negotiate a deal with bankers, he has appealed to popular
nationalist sentiments by declaring his unwillingness to
economic growth choked by foreign debt payments.
see
Domestic political pressures are likely to propel
Salinas to seek another round of debt renegotiations early
in his administration. We believe he will try to gain
concessions from creditors in part to appease domestic
critics who argue his anti-inflation austerity policies
better serve US than Mexican interests. In our view,
Salinas probably believes he will lose nothing by advocating
a harder line with creditors, and he might gain some
leverage over bankers by pointing to leftists' demands
suspension of debt service payments.
for a
We believe Mexico City's negotiating position is still
evolving, but its key demand probably will be for a
substantial foreign reduction in interest and principal
payments in return for implementing domestic austerity
measures and for staying current on obligations. Aiming to
cut interest payments in half, the new administration
probably will propose reducing the interest rate, adding
interest payments due to outstanding loans, or making
interest payments in pesos. Mexican officials also want to
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slash principal repayments and are likely to press creditors
to stretch out the payback timeframe, possibly to as much as
40-50 years, with a 10-15 year grace period.
Mexico's eroding current account balance could
strengthen the argument of those Mekican officials Who
believe that attempting to chip away the annual interest
bill through a debt-for-bond 6Wap is a waste of time. Soft
oil prices, sluggish export growth, rising imports, and
higher interest payments already have slashed the current
account surplus for the first half of this year to $200
million, compared with $2.8 billion during the same period
last year, and may push the current account into a small
deficit by yearend. If the situation continues, MeXican
officials might ask the IMF, the World Bank, and commercial
lenders for new loans.
Bankers are likely to be skeptical about Mexico's
refinancing needs, and their reluctance to participate in
Mexico's debt initiatives or lend new money probably will
pose threats to Salinas' plans. Even if Mexico City
provides a partial guarantee of interest payments for
another debt-for-bond swap, we doubt that many bankers will
be willing to go along. Nearly all the major banks will
continue to balk at writing down their loans, and many
regional banks are likely to view the swap simply as an
exchange of one kind of risk for another.
Implications for the United Stites
Salinas' determination to make creditors match Mexico's
economic sacrifices portends a drawn-out struggle with
bankers. To offset potential political damage at home,
where he is widely perceived as sympathetic to US interests,
Salinas may lash out rhetorically at the United States for
failing to help relieve Mexico's debt service burden.
However, the inability of Brazil to force bankers to forgive
a portion of the debt by using confrontational tactics, as
well as the risk of losing short-term trade credits,
probably will keep Salinas from taking a radical step such
as a suspension of debt payments.
Should public disaffection increase as a result of
stalled debt negotiations and a further downturn in the
economy, Salinas is likely to try to deflect domestic
political pressure by assuming an activist stance against US
policies in Central America and elsewhere in the region. An
anti-US foreign policy direction would have few negative
domestic consequences and could placate Salinas' more
strident leftist critics.
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APIEMDIX
Mexico City unveiled a debt-for-bond sWitip in December
1987 that aimed to exchange up to $10 billion in 20-year
Mexican bonds for $20 billion in public Sector debts. To
attract banks, Mexico City offered to pay a higher interest
rate on the bonds' semi-annUal paYtentb than on currently
outstanding loans. As collateral for the principal payment
on its bonds, Mexican officials proposed to purchase a 20-
year US Treasury zero coupon bond, Sold At a deep discount
because it pays interest only at maturity.
Both the total number of bids and the discounts offered
by bankers fell short of the government's expectations. Of
the $6.7 billion in bids submitted, Mexican officials
decided they could accept only half, with an average
discount of 68 percent of face value, in order to reduce
their annual interest bill And proclaim the deal a success.
According to the Embassy, the largest number of acceptable
bids came from Japan, followed by the United States and
Canada. Most of the major European banks shunned the swap.
Following the precedents set by Brazil and Chile,
Mexico inaugurated a debt-to7egOity conversion program in
April 1986. Until its suspension in October 1987, only
public sector debt could be traded for equity inveStMent in
Mexico. Foreign companies could redeet Mexican government
debt purchased on the secondary Market At 50 to 60 percent
of face value at a higher conVerSion rate froM the Ministry
of Finance. The government cohVersion rate, Which ranged
from 75 to 100 percent of face value, depended on the
priority of the investment. Investments in export
industries and state firms up for sale received the highest
rates. Critics within the government argued that the
program was subsidizing foreign investments that were
already planned.
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Table 1
Mexico:
Balance of PaqMehts
Billion US$
1982
1983
1984
1985
1986
1987
1988*
Trade balance
6.8
13.8
12.9
8.5
4.6
8.4
4.6
Exports f.o.b.
of which:
21.2
22.3
24.2
21.7
16.0
20.7
21.2
Crude oil
15.6
14.8
15.0
13.3
5.6
7.9
6.5
Imports f.o.b.
14.4
8.6
11.3
13.2
11.4
12.2
16.6
Services, net
of which:
-13.3
-8.6
-9.1
-8.2
-6.7
-5.2
-5.6
Interest
payments
13.4
10.5
12.2
10.2
8.3
8.1
8.9
Tourism, net
0.6
1.2
1.3
1.1
1.2
1.5
1.7
In-bond plants
0.9
0.8
1.2
1.3
1.3
1.6
1.8
Transfers, net
0.3
0.3
0.4
1.0
0.5
0.7
0.6
Current account
balance
-6.2
5.4
4.2
1.2
-1.7
3.9
-.4
*Projected
Note: Figures may not add up dile to rounding
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SUBJECT: MEXICO'S EVOLVING DEBT STRATEGY
Distribution:
1 David C. Mulford, Assibtaht Secretary for
International Affaira, Roo h 3432, Treasury
1 - James W. Conrow, Deputy Abbiatant Secretary,
Developing Nations, treASUry
1 - Charles Siegman, Senior AsOciate Director, Division
of International Finance, Board of Governors,
Federal Reserve System, 20th & Constitution Ave., NW
Washington, DC
1 Stephen Danzansky, Special Assistant to the
President and Senior Director, International
Economic Affairs, NSC, Room 865, OtOti
1 Robert Pastorino, Special Assistant to the President
and Senior Director for Latin Aterican Affairs, NSC,
Room 391, OEOB
1 - Elliot Abrams, Assistant Secretary, Inter-American
Affairs, Room 6263, State
1 - Richard Melton, Deputy Assistant Secretary, Inter-
American Affairs, Room 4915, State
1 - Alan Larson, Deputy Aasistaht Secretary, Economic
and Business Affairs, itOoM 6828, State
1 William Milam, Deputy Asitant Secretary,
International Finance and Developffient, Room 4828,
State
1 - John St. John, Director of MeXican Affairs, Room
4258, State
1 Richard Johnston, Deputy Assistant Secretary,
International Trade Policy, RodM 6527, Commerce
1 - Donald Abelson, Director of MeRican Affairs, Room
519, USTR
1 - Deane Hoffman, NIO/ECON, Room 7E48
1 - Martin Roeber, Nb/LA, Root 7E62
1 - DO/LA, Room 3C3203
1 - D/ALA, Room 3F45
1 - DD/ALA, Room 3F45
2 - ALA/PS, Room 4F21
1 - C/PES, Room 7F24
5 - CpAS/IMC/CB, Room 7G07
1 - D/OGI, Room 3G00
1 - C/OGI/ECD, Room 3G46
1 - C/OGI/ECD Room 3G46
1 - EURA/IAD/Regional Economic Issues Branch, Room 5G44
1 - OEA/Japan Branch, Room 4G31
1 - C/MCD, Room 4F29
1 - DC/MCD, Room 4F29
3 - C/MX, Room 4F39
1 - MCD division files
3 - MX files
DDI/ALA/MCD/MX,
(12 Sept 88)
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