Washington To The Rescue. Now, About The Price...

Senate Foreign Relations Committee Chairman Jesse Helms (R-N.C.) wants Mexico to make illegal immigration a criminal offense before the U.S. shells out a dime of emergency aid. House Democratic Whip David E. Bonior of Michigan insists that Mexico boost wages and U.S. imports. And America Firster Patrick J. Buchanan wants the Mexican government to put Pemex on the auction block.

All that sound and fury emanating from Washington has been sparked by the Clinton Administration's proposed $40 billion in loan guarantees to rescue the Mexican economy. Yet despite the vocal protests, a deal is falling into place--because the U.S. capital's premier power brokers have joined forces to see to that.

Even so, nailing down details of the plan is proving tough: Congress is demanding ironclad assurances that Mexico will pay stiff risk premiums and embark on stringent economic reforms before any U.S. taxpayer money is

exposed. And lawmakers want the terms of the deal made explicit. But the Mexican negotiators, sensitive to domestic resentment of U.S. dominance, want to keep their concessions out of the pubic glare.

However the two sides end up handling the diplomatic cover, key elements of the package are emerging. The Mexicans will have to pay a fee of around 10% of the guaranteed loans they draw on. By contrast, Israel paid a 4.5% premium for U.S. guarantees on loans to build housing for refugees from the former Soviet Union. The Mexicans will also have to pledge future oil revenues as collateral. To calm jittery markets, Washington may have to guarantee both the principal and interest on dollar-denominated loans with maturities of up to 10 years. And U.S. officials expect Mexico to make deep cuts in government spending and to sell off state-owned industries. "We don't want this to be a bargain for the Mexicans," explains a U.S. official.

The conditions may be hard for Mexican officials to swallow. They point out that over the past six years, they have already slashed their budget deficit and opened up their markets; they have sold off state companies as well. "We don't need to be told how to reform our economy," one official said. "We've done quite well on our own over the years."

IMMIGRATION WAVE. Still, too much is at stake for either side to walk away from the financial crisis touched off by the sharp devaluation of the peso. Without a quick infusion of aid, Mexico's crisis would only worsen. For the Americans, that raises the prospect of a new wave of illegal immigration. The Administration estimates that 430,000 additional illegals might cross the border this year into Texas and California alone. Moreover, Mexico's economic failure would be a major strain on the North American Free Trade Agreement and cause panic in Latin American financial markets. "If we fail to act, the crisis of confidence could spread to other countries throughout the hemisphere," Clinton said.

That's why U.S. officials couldn't wait to let slow-moving, bureaucratic institutions such as the International Monetary Fund manage the crisis. Treasury Secretary Robert E. Rubin and Federal Reserve Chairman Alan Greenspan quickly won support for the bailout plan from both House Speaker Newt Gingrich (R-Ga.) and Senate Majority Leader Bob Dole (R-Kan.). The blessings from the GOP high command mean the Administration will be able to secure enough votes in Congress to pass the aid package. Just to make sure, Greenspan has taken the rare step of actively--and publicly--lobbying lawmakers to back a bailout.

The stiff terms will add to Mexican President Ernesto Zedillo Ponce de Len's political woes. Already unpopular, Zedillo is eager to avoid charges that he is turning Mexico into a colony of the U.S. It's not clear that "the Mexicans can afford politically to attach their crown-jewel assets," maintains Mark J. Seigel, head of emerging markets at Putnam Investment Management.

FRIGHTENING SCENARIO. But neither can Mexicans afford to quibble over political appearances. Mexico's banking system is reeling from the devaluation and is likely to suffer further losses from the resulting economic slowdown. On Jan. 16, Grupo Financiero BanamexAccival, Mexico's largest financial group, reported a $102 million loss for the 1994 fourth quarter. If the negotiations over the loan guarantees drag on, Mexican banks could start collapsing. "Without an influx of dollars, the banking system is going to decompose," says Lawrence D. Krohn, chief Latin American strategist for Union Bank of Switzerland.

Visions of that scary scenario are what drove Mexican officials to press Washington over the weekend of Jan. 7 to 8 for more aid. By then, it was clear that a previously announced, U.S.-led, $18 billion international credit line was insufficient to calm the markets. Rubin, Greenspan, and Lawrence Summers, Treasury Under Secretary for International Affairs, huddled through the weekend to come up with a more convincing package.

No matter what the final terms of the deal, one thing already is clear: Mexico has reverted to its traditional role as a ward of the U.S.

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