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U.S. Aid Leaves Mexico With Major Uncertainty

January 14, 1995

WASHINGTON (AP) _ Faced with the prospect that a collapsing Mexican economy could have serious economic and political fallout in this country, President Clinton has dramatically increased the potential U.S. support.

The big question: Will it work?

The short answer is probably yes, for a while at least. Even with details of the plan still sketchy, Mexican financial markets rallied again Friday, posting a third straight day of gains and recouping a bit of their big losses.

But even if the promised U.S. loan guarantees are enough to ease the short-term cash squeeze, Mexico will still face huge uncertainties down the road brought on by the sharp devaluation of its currency.

That bleak outlook includes skyrocketing inflation from a peso that has lost more than one-third of its value since Dec. 20, and quite likely a recession as the Mexican government’s economic austerity program begins to pinch.

Clinton is facing fallout as well. Before Mexico’s economic meltdown, the president had proudly touted the North American Free Trade Agreement as one of his biggest victories, providing the United States with a stable and growing market for its products in Mexico and Canada.

But the weaker peso means American products are now one-third more expensive in Mexico while Mexican products are suddenly cheaper _ and more appealing for Americans.

Thus, America’s trade surplus with Mexico, which had already shrunk to $2 billion last year, is likely to disappear altogether and turn into a trade deficit in 1995 as U.S. products are priced out of the Mexican market. So much for big gains in American exports under NAFTA.

``This so-called free-trade agreement is proving to be anything but free for U.S. taxpayers and working families,″ Rep. Peter DeFazio, D-Ore., a staunch NAFTA opponent complained Friday. ``It’s cost tens of thousands of U.S. jobs already and is now well on its way to becoming the biggest taxpayer bailout for banks and foreign interests since the savings and loan scandal.″

And the most famous NAFTA critic, Ross Perot, attacked the loan guarantees Friday, saying, ``it’s an economic crisis ... that is going to get royal treatment at U.S. taxpayer expense so that politicians don’t get embarrassed by the stupid trade deal they did.″

Such complaints will intensify as the administration lobbies the loan guarantees through Congress in coming weeks.

But in the end, the expanded rescue package should win support. House Speaker Newt Gingrich, R-Ga., and Senate Majority Leader Bob Dole, R-Kan., joined in Thursday night’s joint statement with the president pledging to ``do what is necessary to restore financial confidence in Mexico without affecting the current budget at home.″

Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan were on Capitol Hill Friday, briefing more than 100 senators and House members behind closed doors on just what that grand promise entails.

While administration officials have given a wide range of between $25 billion to $40 billion in possible loan guarantees, lawmakers who attended the briefing said they believed $40 billion was the outside limit and that Mexico will need much less.

Despite charges of a bailout, the guarantees will require no direct payout of money. Instead, the U.S. government is simply guaranteeing repayment if Mexico defaults. Since an outright default by a country on official debt is extremely rare, U.S. taxpayers should be relatively safe.

The Mexican program is modeled after $10 billion in guarantees the Bush administration offered Israel to help finance housing construction to meet a tide of Soviet immigrants.

The guarantees are expected to be used to help Mexico meet obligations on $28 billion in short-term debt coming due this year while bucking up the confidence of international investors that Mexico can work its way out of the immediate difficulties.

While economists think the U.S. package will achieve this short-range goal, they still worry about the long term. One big worry is whether the belt-tightening will spawn riots and major strikes from an outraged Mexican population.

``The U.S. package has already worked in the short term in stabilizing the crisis, but it will take a long time to rebuild this big a loss of confidence,″ said David Hale, chief economist at Kemper Financial Services in Chicago.

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Editor’s Note _ Martin Crutsinger has covered economic issues in Washington since 1984.

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