S. K. Witcher,
"Loans to Third World to be More Politicized By Mexican Debt Pact," Wall Street
Journal, 10/10/84.
Basically, the article reports two things. First, that Mexico’s government is being bailed out on its debt payments to the tune of $50 billion dollars and that this money is political. The second part argues that the IMF’s has agreed to be the world’s credit rater and that this is a bad thing.
To aid with Mexico’s debt problems, William Rhodes of Citibank helped organize $50 billion dollars of credit to be loaned to the government of Mexico. However, not only was this money not enough, but it also sets a dangerous precedent for banks and the IMF in developing nations to bailout failing policies.
When the loans go bad, it will ultimately be the American taxpayers who will be stuck bailing out the banks because the U.S. government pushed for them so much. However, many nations are eager to get involved and shape the new course of international finance. This has lead to the relatively high degree of politics that go into foreign bailout packages.
The agreement basically amounted to a postponing of the principle payments due in 1990 so that Mexico could put its house in order. The problem as critics cite is that this does nothing to address the ineffectiveness of the government policy and postpones the inevitable collapse. The interest payments are also ignored by the package. Interest alone represents $12 billion a year, a considerable sum.
One of the overlooked problems of the deal is the crowding-out effect on interest rates. Because about half of the loans come from Mexico’s 500 or so lending institutions, the banks will not only will they be earning less profit, but any private sector loan rates will go up as the supply of liquidity shrinks. Foreign banks too will suffer as they are forced to take diminished returns. This has caused many foreign nations to begin demanding that their loan money be used to buy their exports. This further politicizes the situation.
The IMF is now being asked to conduct bi-annual reviews of Mexico’s economy. This is supposed to increase accountability for the use of their loan money. It is also suppose to deter risky foreign investment by making the risk more explicit to shareholders.
According to this article, the IMF is a mostly outside observer of events; however making it the director of foreign loans would put it too firmly in the banker’s camp against the companies. The article then outlines a scenario where Mexican labor is too strong to have austerity imposed on it and forces Mexico to beg the U.S. for leniency. The U.S. agrees and the bankers are “hoodwinked” into making a poor investment.
Useless Reports?
The author of the article worries that the reports might make the IMF lose its role as “an ‘honest broker’”. The plus side from a troubled government’s point of view is that the Fund can be blamed for the austerity programs. This, however, might lead to revolt. In all, the reports are a dangerous thing that over politicizes the IMF’s role.
~M
att
C uller