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As part of the effort to obtain the passage of Fast Track authority And IMF refunding, , the Trade lobby is arguing the "success" of the bail Out package for Mexico following the collapse of the foreign exchange value of the peso beginning in December 1994. In order to portray NAFTA and the Bailout as pointing to the road to future global prosperity the Trade Lobby has promoted several "spin" themes:

BAILOUT MYTHS

(1) "The peso crisis that led to economic catastrophe for Mexico was caused by the monetary mismanagement of the Mexican Government and had nothing to do with NAFTA."

FACT: The peso crisis was directly linked to the NAFTA movement and would not have occurred without NAFTA. This is discussed in part 1 of this article.

(2) The bailout has resulted in restoring the Mexican economy.

FACT: The large Mexican multinational corporations have recovered and their stock prices are at new high levels. However, the domestic economy remains at Depression levels with real wages over 25% below the pre-NAFTA level and over 2 million lost jobs in the domestic economy These are part of the harsh conditions imposed by the Mexican Govt. in response to the demands of the US and the IMF, Mexico's leading creditors.

(3) Mexico has paid all of it's debts from the Peso crisis.

FACT: Mexico's external debt (denominated in hard foreign currencies) is at record high levels and many Mexican and foreign observers believe that default ( or "restructuring") in some form is inevitable. Mexico has simply "rolled over" its debt as it became due or paid using funds from new foreign borrowings. By various paper manipulations and new borrowings at even higher rates Mexico has repaid the portion of the bailout, $11+ Billion, that was actually loaned from the U.S. Treasuries "Exchange Stabilization Fund". This is simply smoke and mirrors. The total amount, public and private, owed By Mexico to foreign institutions is over $170 Billion of which over $ 40 Billion is owed to U.S. institutions including the government. Japan, which has made large investments in moving its electronic and auto manufacturing to Mexico's maquiladoras (where the products have unlimited free access to the U.S. market) has become a major lender to Mexico.

MAJOR MEXICAN CREDITORS (as of June, 1997)

U.S.A. - $42 Billion
Japan - $28 Billion
IMF - $17 + Billion
World Bank, B.I.S., etc. - $13 Billion

The first of the "Bailout Myths" concerning the peso crisis and its cause is discussed in the rest of this article. The others will be discussed la ter.

THE PESO CRISIS AND ITS CAUSE

In mid-December 1994, the Mexican Finance Minister Jaime Serra Puche, Newly appointed by the incoming Zedillo regime, announced that the value of the Peso in foreign exchange markets was secure. This reassured U.S. investors who Had purchased tens of billions of dollars in Mexican securities under the Wall Street's "Emerging Markets" investment fad. J.P. Morgan had just opened both ban king and brokerage businesses in Mexico. Puce was well known in U.S. investment circles as the official who furnished over $30 million to fund Mexico's U.S. lobbying efforts during the NAFTA debate. Many New York money center banks invested in Tesobonos, Mexico's short term (90+ days) government notes which promised to repay principal and interest in dollars at rates well above those of U.S. notes. Some Wall Street firms were advising there clients to speculate in the risky 28 day Cetes which were Mexican Govt. bills denominated in pesos. Nevertheless, in the private accounts of major Mexican investors, the investment firms were selling Mexican stocks. Mexican billionaires like television baron Emilio Azcarragua were exchanging their firms dollar denominated debt for peso notes.

On December 20, 1994 , less than a year after NAFTA took effect, the Mexican peso, which had been trading in a narrow range around 3.11 to the dollar for months, began plunging, losing over 30% of its value against the dollar in the following week. The Finance Ministry at first announced that it had decided to allow the peso to "trade in an expanded 15% range", then announced that it would let the peso "float", then finally admitted that Mexico's reserves of hard currency had been depleted to a level that it could no longer support the peso. On December 26, President Zedillo, who was scheduled to deliver a major economic address, spoke for only 15 minutes in generalities about the need to "control this grave threat". On December 28, the U.S. disclosed that it was discussing a bailout plan that involved new forms of debt in order to keep investor money in Mexico. A few days later the Mexican government announced the replacement of Jaime Serra Puce with Guillermo Ortiz as Finance Minister.

The fall of the peso was a disaster for Mexico which had borrowed heavily in order to finance the industrial and commercial expansions that came with NAFTA. The great bulk of these debts had to be repaid in dollars with over $30 Billion dollars falling due in the next few months.. No foreign lenders would lend Mexico peso debt or roll over the Mexican Cetes. Short term rates for peso debt shot up from 13% to over 40% as many domestic businesses were forced to close. Clearly the Mexican monetary affairs had been badly mishandled to produce this catastrophe. The need to devalue the peso had been discussed by independent U.S. and Mexican economists for more than a year. In March, 1993 Ross Perot stated in Congressional testimony that Mexico would devalue the peso in following their August 1994 national elections. Independent Mexican economist also Jorge Castaneda published articles indicating that the peso needed to be devalued. Yet Mexico was maintaining the peso at 3 to the dollar. The reason that the peso continued to be held at artificially high values was to further the political ambitions of the Salinas- Clinton alliance which was trying hard to ensure the passage of NAFTA.

The appearance of a successful , growing Mexican economy was vital to the Trade Lobby's attempts to pass NAFTA. In September 1993 Clinton and three former Presidents kicked off an intensive final drive to pass NAFTA. Clinton pointed to the "lucrative" Mexican consumer market for US retail goods that would become available if NAFTA were passed. He claimed that in 1992, the average Mexican consumer had purchased $267 in U.S. consumer goods (the actual amount was about $80) and that this would increase dramatically when NAFTA passed. Mr. Clinton did not explain how this would happen when the income of most Mexicans remained below $4,000 per year.

In the pre-NAFTA period the U.S. government and the Salinas regime actually conspired to produce the appearance of a "Mexican Economic Miracle". An overvalued peso which allowed Mexicans to purchase more U.S. exports and attracted foreign investments was part of the strategy. This joint program was confirmed recently when the leader of tthe new Mexican Assembly, Poririo Munoz speaking on Nov. 24,1997 at the National Press Club stated the peso crisis was directly linked to NAFTA and that through 1993:

"It is clear enough that President Salinas maintained the value of the peso at a level that facilitated the approval of NAFTA. 85 Carlos Salinas maintained the peso at an overvalued level because he was wooing American entrepreneurs and the American public85 Then [result of] the overvalued peso was the increase of American exports and the reduction of Mexican exports. That was intentional, we can prove that. It92s in the American papers also."

The mechanism for this manipulation of the Mexican currency was to borrow dollars to build up a large foreign currenccy reserve level at the central bank (The Bank of Mexico) through which foreign currency exchanges were transacted. At the beginning of 1994 the level of hard currency reserves amounted to $25 Billion. These funds were then used to maintain the exchange rate at 3 pesos per dollar (slipping to 3.11 pesos to the dollar in April 1994). This produced a large deficit in Mexico's international balance of current accounts which forced Mexico to borrow more and more abroad. Mexico's 1993 trade deficit was $13,462 billion which worsened to $18,464 in 1994.

In the past decade, the projected Mexican economic rates have been fixed by an annual agreement between business, government run labor unions and the government called El Pacto. During these periods the pacts called for strong increases in labor wages and only moderate price increases. Thus using an artificial monetary policy and the booming expansion of the Maquiladoras in anticipation of the passage of NAFTA, the Mexican economy appeared to be booming drawing a increasing funds from American investors for Mexican securities.

Even after the passage of NAFTA in late 1993 , the Salinas regime continued to support the peso at an artificially high level through 1994. The reasons for this were:

(1) To maintain an apparently strong Mexican economy through the August national elections.

(2) To preserve the image of the "Mexican Economic Miracle" through period of the GATT debate in the U.S. and to support the Clinton Administration's endorsement of Carlos Salinas for the presidency of the WTO.

To further enhance the short term performance of the economy, the 1994 El Pacto provided for a 17% increase in wages. The Salinas regime then went about boosting the domestic money supply. In 1994 the Mexican monetary base increased by 23%.20 These measures kept the "miracle" music playing but at the cost of increasing the pressure on the peso and Mexico92s overall international deficits. T his caused Mexico to accelerate their sale of Tesobonos to foreign investors. Munoz stated that, "After the approval of NAFTA , Carlos Salinas insisted on maintaining the overvaluation of the peso. It was a concession. It was a secret agreement [with the United States]."

When the currency reserves sank in April, the government privatized the Bank of Mexico which ceased the regular reporting of its reserves. By July many economists and even the CIA were warning that the currency reserves had sunk to a level that put the future of the peso in doubt. Following the PRI victory in the August 1994 elections, Guillermo Ortiz of the Finance Ministry proposed devaluing the peso over time by 15 %. devaluation was widely anticipated among financial experts and would not have produced a great shock. Nevertheless the plan was rejected by Central bank chief Miguel Mancera "and others". The "others" must have included president Salinas. U.S. However, President elect Zedillo did pressure Salinas to devalue the peso. Zedillo also pressured Salinas to ask the U.S. to make good on a previous secret promise by Secretary Bentsen in 1993 to set up a $6 Billion currency stabilization fund for Mexico's use.

In October, the Central Bank made its last 1994 announcement of currency reserves at $17 Billion. After that, the flight of dollars from Mexico accelerated. On Nov. 18 alone some $1.6 Billion of the reserves were spent. Zedillo again urged a plan for evaluation and a U.S. loan to stabilize the peso. This was again rejected by Salinas who had only a few days left in office. After Zedillo was inaugurated on December 1, 1994 Mexico asked U.S. Treasury Secretary Bentsen for an urgent meeting but Bentsen declined on the basis that he was announcing his resignation and that Secretary designate Rubin should handle the response. Lower level U.S. officials rejected the loan request until Rubin was officially installed which wasn92t until January 11. These same officials were scrambling during the Christmas holidays to find any foreign officials willing to loan Mexico funds to stabilize the peso or stop the free fall of the Mexican stock market. Thus the Mexican financial ship sailed on to the late December waterfall with the chief Clinton-Salinas culprits either abandoning the ship or believing that there was plenty of time to react. This is hard to understand in Bentsen's case since he later admitted in a press conference in Mexico that he was fully aware of the dangerously sinking Mexican reserves even while Clinton continued to praise the Mexican economy. As late as December 9, Clinton praised Mexico's economic management as a model for other world economies.

The peso crisis which began in December 1994 left Mexico in dire financial condition in which she held almost no hard currency reserves and had over $30 billion of foreign held debt coming due in 1995. Some $23 Billion of this was in the form of short term Tesobonos A major portion of this debt was held by U.S. investors and banks which had preferred the higher interest rates available in Mexican bonds. As the crisis started the Clinton Administration began a campaign to get congressional approval of a bailout package of $40 Billion which would cover the short term loan repayments and provide a needed hard currency reserve to help stabilize the imploding domestic Mexican economy. This effort stalled in Congress due to the perception that the U.S. taxpayer was being asked to bail out the money center banks which would nice profits from the bailout.

The U.S. financial establishment's bailout efforts were led by the new Treasury Secretary Bob Rubin and the Federal reserve chief Alan Greenspan. Both testified that if the package was not forthcoming, the fallout would devastate world financial markets. A later study by the World Bank concluded that the fallout would have had little effect on other world markets. The study also concluded that the December crisis had been .forced by wealthy Mexican businessmen who rushed to convert pesos to dollars after a late night private briefing on December 19 by Zedillo and the financial chiefs that revealed that the Mexico's currency reserves had nearly vanished. It is interesting to note that many of the big banks that were at risk in the repayment of the Tesobonos were the banks that owned the Federal Reserve In January the Federal Reserve Bank entered the foreign exchange markets to buy pesos in an effort to slow the continuing peso collapse. When Congress balked, the US reached for allies in the IMF and elsewhere. The Bank of International Settlements is an association of the central banks of the countries less affluent than the G7 and has generally been ignored by the US. Early in the Bailout discussions, Alan Greenspan and the Chairman McDonough of the Federal Reserve Bank of New York quietly joined the Board of Directors of the B.I.S. As Congressional sentiment hardened against the bailout, the Clinton Administration announced a bailout package which did not require the concurrence of Congress. It may also be noted that Secretary Rubin had headed the Wall street investment firm of Goldman, Sachs where he personally handled the accounts of many of the top Mexican business and political leaders. When Rubin was appointed head of the President's Economic Council he announced that he would recuse himself from decisions involving Mexico due to his extensive Mexican associations. Apparently, when he became Secretary of Treasury these restrictions no longer applied.

The bailout package, which was signed on February 21, 1995 after approval by Clinton and letters signed by Dole, Gingrich, Daschle, and Gephardt, provided a $52 Billion credit to Mexico which consisted of $17.8 Billion from the International Monetary Fund, $20 Billion from the U.S. Treasury exchange stabilization fund, $10 Billion from the Bank of International Settlements and the remainder from various U.S. banks. . As a condition of the loan the income from Mexico's oil exports was to be deposited in an account at the Federal Reserve bank as collateral against the U.S. Treasury loan. One can only imagine the behind the scenes arm twisting and promises the U.S. must have made to put this package together. The IMF had already lent Mexico the maximum amount that its rules allowed so that the additional $18 Billion was quite an exception. Also the B.I.S. had never made such a major loan to a non-member nation, but these impediment's soon gave way under the U.S. pressure. By using these International bank funds, Mexico was able to limit the amount of the $20 billion U.S. credit line that was actually used to only $12.5 Billion.

MEXICO'S FOREIGN HELD DEBT AND REPAYMENT EFFORTS

Mexico's total foreign held debt had grown to over $160 Billion at the time of the peso crisis due largely to Mexico's 1994 Tesobono spree. Even with the bailout loan Mexico had a bad year in 1995 when her Balance of Current Accounts deficit grew to over $18 billion. Even with the repayment of the Tesobonos Mexico's total external debt grew by more than $10 billion.

MEXICO'S EXTERNALLY HELD DEBT: BILLIONS OF DOLLARS OWED

DEBTOR SECTOR	DEC/94	DEC/95
Banco De Mexico	3.9	18.6
Public Sector	105.8	103.7
Mexican Banks	25.1	20.8
Private Sector	27.8	30.3
Total	162.6	173.4

SOURCE: Institute of International Finance; Mexican Finance Ministry data, Banco de Mexico

Over one quarter of this debt, or nearly $ 50 Billion, was owed to U.S. institutions. Thus the U.S. has much more than the $12.5 Billion in bailout loans at stake. The growth in the debt owed by the Bank of Mexico was largely accounted for by the need to rebuild her foreign currency reserves. The Bank showed a reserve at the end of 1995 of $15 Billion. The debt owed by the bank to the IMF increased from $3.9 Billion to $16.4 Billion during 1995. In addition the Bank and the Government repaid a total of $4 Billion of the loans owed by Mexican banks to foreigners. It is apparent that Mexico retired only a small amount of her foreign held debt during 1995 so that the great bulk of her maturing debt (including the Bailout loans) was simply rolled over. On October 5, 1995 Mexico announced with great fanfare that she was repaying $700 million of her Bailout debt "early". This was publicized as evidence that the Mexican economy was recovering. Actually the Mexican economy was plunging into a 1930's style depression. The reality was that Mexico was due to repay $2 Billion of U.S loans at the end of October. Since she was unable to do so she repaid $700 million of the loan to weeks early in exchange for a U.S. promise to rollover the remaining $1.3 Billion. The $700 million did not represent a reduction in Mexico's foreign debt but only the fact that she was in the process of borrowing that amount from German investors.

In the first quarter of 1996 new foreign loans to Mexico were made in the amount of $3 Billion in order to allow her to repay maturing debt. The bulk of these loans were absorbed in the U.S., Europe and Japan. Then in July 1996 during the election campaign, the U.S. media featured the headline: "MEXICO TO REPAY $ 7 BILLION OF LOAN". The funds of course, came from new foreign loans based mainly on a floating rate bond that would pay an interest rate of more than 2% above the Libor rate. The key to this new loan was that the U.S. released it's right to the bulk of the oil income account which was then used by Mexico as collateral for the new loan. While the U.S. media made no mention of the fact that the collateral for the bailout loan had been returned, the Mexico media headlined the event as: "U. S. WILLING TO FREE OIL COLLATERAL".

The benefits were almost totally in the political hype. Mexico was actually paying a higher interest rate on her loan and still had her oil income pledged to foreigners. Her only consolation was that the foreigners weren't Yankees. By the end of 1996 Mexico's foreign held debt had grown to about $175 Billion and a quarter was still owed to the U.S. Thus while the Bailout debt has been moved around, the total owed by Mexico continues to trend upward in spite of great sacrifices by the Mexico people. The U.S. is also still liable for its share of the IMF loans.

Mexico is still faced with an almost insurmountable debt problem which the Spin of neither the Clinton or Zedillo government can overcome. As Mexican financial expert Chris Whalen has pointed out , it is very difficult for Mexico to earn more than $ 5Billion per year in hard foreign currency. After two years in the black, Mexico's Current Accounts are again going into deficit as oil prices decline. At the higher interest rates Mexico must pay, her annual interest is around $15 Billion. For these reasons a number of experts question whether Mexico will ever be able to repay all her U.S. loans.