Anatomy Of A Rescue Mission

The call came to the White House at 8 p.m. on Jan. 30. It was House Minority Leader Richard A. Gephardt (D-Mo.), and the news was bad: President Clinton's controversial $40 billion loan-guarantee plan to prop up the Mexican peso was dead on Capitol Hill. With stock markets from Brazil to Thailand shuddering at the prospect of a Mexican government default, top Administration officials labored through the night to craft an alternative plan.

Bleary-eyed Treasury Dept. officials quickly cobbled together an international peso posse. After getting the legal O.K. to draw $20 billion from a discretionary Treasury fund normally used to support the dollar, Treasury Secretary Robert E. Rubin and his top international strategist, Lawrence H. Summers, phoned French and German Finance Ministers in a desperate race to line up billions more in international support. The final piece of the package fell into place at 5 a.m. on Jan. 31, when the International Monetary Fund reluctantly agreed to kick in $10 billion on top of $7.8 billion it had pledged earlier--a record commitment from the fund.

By dawn's early light, Treasury had Plan B in place. The bottom line: a $49.8 billion package--remarkably similar to the original bailout--that averted a meltdown in the world's financial markets. "The risks of inaction are greater than the risks of decisive action," Clinton declared later that morning to a meeting of state governors. "This is the right thing to do."

The revised rescue comes with plenty of strings attached. Mexico will have to cut government spending, slow the growth of private credit and its money supply, and sell off more state-owned industries. And Mexico will have to fork out hefty fees for the right to tap $20 billion in U.S. loans or loan guarantees, which will make it easier for the government to borrow in commercial markets. But since the plan will bypass Congress, there are no politically touchy demands to improve labor standards or border controls on migration, two conditions sought by U.S. lawmakers.

For now, the bailout appears to be working. Jittery foreign investors, who saw their Mexican holdings eroded by a 45% collapse in the peso since December, were looking on the bright side. By Feb. 1, stock prices on the Mexican bolsa were up 5.2%, and the peso rose 18% to 5.4 to the dollar. "The President's decision helped stabilize other markets as well as Mexico's," says Arthur J. Massolo, head of the Latin America division at First Chicago Corp.

On Capitol Hill, the plan was a godsend. A month earlier, Congress would have squawked at Clinton's unorthodox use of the Treasury's stabilization fund. Indeed, Federal Reserve Chairman Alan Greenspan told a Senate committee on Jan. 26 that the Fed and Treasury lack authority "as we see it to take that sort of action." But now most lawmakers are pleased they won't have to vote on a highly unpopular bailout. "There was a sigh of relief here," says Representative Sander Levin (D-Mich.). "Most [members] will welcome it without saying so."

Throughout Corporate America, Mexico-minded executives could only hope that the worst was over. Ford Motor Co.'s plans to double vehicle shipments to Mexico to 50,000 this year is now "a pipe dream," says CEO Alexander J. Trotman, though Ford says it's sticking with plans to shift some operations south of the border. Adds Nicholas F. Fiore, senior vice-president of Carpenter Technology Corp., a Reading (Pa.) steelmaker: "We expected short-term setbacks and windfalls, but we wouldn't have gone in if we weren't in for the long haul."

The massive international bailout plan rapidly organized by distressed U.S. officials signals a seismic shift in the global financial order. Just as the American public and Congress are growing weary of the U.S. military shouldering sole responsibility for policing the globe, America's days of being the emergency banker for every financial crisis may be over as well. Deal broker? Yes, Washington will continue to lead. But, says a senior Administration official, "the U.S. cannot be the world lender of last resort".

TOURNIQUET. In an era of quicksilver capitalism, global-market panics will likely become more commonplace. But playing commander-in-chief of the international bucket brigade poses political risks for Clinton. His authority is already under attack at home by a new breed of populist lawmakers wary of foreign entanglements.

At this point, concerns about Clinton's political future pale in comparison to worries about Mexico's economic outlook. Whether the bailout is a long-term solution or a tourniquet ultimately depends on Mexico's willingness to swallow harsh economic medicine. Meeting the stiff economic conditions "will just put Mexico into a big recession, and it is not clear how the country will come out of it," says Rudi Dornbusch, an economist at the Massachusetts Institute of Technology. David Hale, chief economist of Kemper Financial Services, fears that even with new help, the peso's downward spiral will triple the size of nonperforming loans at Mexico's undercapitalized banks to about 30% of their portfolios. "The chances for bank failures are very high," he warns.

Many traders believe that the package will enable Mexico to lessen its risky dependence on short-term dollar-denominated securities known as tesobonos in favor of more stable, long-term financing. But others say that Mexicans must go far beyond the reforms called for in the bailout to bolster their economy and rebuild investor confidence. "The best thing they could do is what Argentina has done--open everything up to foreign investment," says Lawrence D. Krohn, head of Latin American research for Union Bank of Switzerland.

Traders and analysts still have serious reservations about whether the plan is sufficient to fully shore up Mexico's wobbly finances. And they question the willingness of Mexicans to accept promised wage hikes of just 7% after a 45% devaluation. Yet they are encouraged that the new package may actually be larger than Clinton let on. Commercial banks led by Citicorp and J.P. Morgan & Co. may still come through with $3 billion in loans announced in December. Ultimately, including the private money, the final package could top $55 billion.

The outcome is hardly what the Clintonites were expecting when they fashioned the original $40 billion bailout package in mid-January. Congressional leaders signed on quickly, and approval looked like a slam dunk. As late as Jan. 24, House Banking Committee Chairman James A. Leach (R-Iowa) had won liberal Democrats over with concessions requiring Mexico to upgrade labor standards. The chief Democratic vote-counter, Representative Barney Frank of Massachusetts, promised up to 130 Democratic votes.

But the compromise unraveled when GOP leaders ordered Leach to yank the labor concessions. Lawmakers, frustrated that Summers and Rubin didn't provide details of the plan, began equivocating. Feisty GOP freshmen mounted a surprising and furious revolt against House Speaker Newt Gingrich (R-Ga.). "Newt went out to lead his Republicans, only to learn they weren't following," says one leadership aide. When Gingrich privately admitted he was out of chits after coercing freshmen to back a watered-down balanced-budget amendment, Clinton feared the worst.

NAILED DOWN. News that the plan was faltering spread quickly across the globe. At a world economics conference in Davos, Switzerland, a GOP lawmaker privately confessed to international financiers on Jan. 28 that the rescue plan didn't even have the support of 100 House members.

That helped trigger a Monday morning sell-off in Latin American markets: By noon, the Brazilian bolsa had plunged 8%, and the Mexican peso was on its way to a further 15% collapse. Even as Rubin was trumpeting the support of former Presidents and Secretaries of State at a press conference, Summers was warning senators that Mexico's currency reserves were so low that it could default within 48 hours. Efforts to nail down Plan B began that evening.

Clinton, his all-night plan in hand, summoned congressional leaders to the White House early Tuesday morning. Is there any hope for a vote turnaround, he asked. "You will have to get in the trenches and fight it out member by member," Gingrich advised. That did it. Clinton unveiled the new package and demanded that the leaders publicly back him. All agreed, and the group sneaked out a side door to avoid talking to reporters.

While the Administration's fumbling of the $40 billion bailout dismayed Washington insiders, the speed with which Clintonites assembled the fallback financing impressed many Wall Streeters. In the first real financial crisis sparked by fears of a global run on mutual funds, the new rescue plan may usher in an era of financial cooperation among governments. If so, the U.S. just took a first step toward creating an international safety net to cushion the impact of panics that are sure to proliferate in markets that now move at the speed of light.

Clinton's New Deal For Mexico

Details of the $49.8 billion aid package assembled by the U.S.

THE TREASURY By executive order, Clinton will provide $20 billion in loans with terms of as much as 10 years by tapping the Treasury's Exchange Stabilization Fund--normally used to bolster the dollar.

THE FEDERAL RESERVE The Fed will make available $4.5 billion to $6 billion in short-term loans until the promised longer-term Treasury financing is issued to Mexico.

OTHER NATIONS Major industrial countries will kick in $10 billion in short-term credit through the Bank for International Settlements. In addition, Canada pledged $1 billion and Latin American nations $1 billion.

IMF The International Monetary Fund will provide $10 billion in five-year loans on top of the $7.8 billion in credit it already has promised Mexico.

MEXICO The U.S. and IMF will insist that Mexico adhere to strict targets for money supply, domestic credit, fiscal spending, and foreign borrowing. U.S. loan guarantees will be backed by oil-export revenues to be held by the Federal Reserve Bank of New York as collateral.


Why Clinton Bailed Out of the Bailout

TOO LITTLE CAPITAL The President didn't invest enough political capital to win over Congress. Instead, he gave only brief, tepid support. Why? Clinton may have been reluctant to distract attention from his renewed focus on middle-class issues.

FRESHMAN REVOLT Clinton and Republican leaders underestimated the resistance from first-term lawmakers--many of whom had campaigned on slashing foreign aid. That left House Speaker Gingrich out on a limb.

GOP INFIGHTING The issue became a showdown between two Republican Presidential rivals. Senator Phil Gramm (Tex.), a conservative leader, criticized the plan in part to distinguish himself from Senate Majority Leader Bob Dole (Kan.), the front-runner for the 1996 nomination.

TREASURY NEWCOMER Treasury Secretary Robert Rubin knows financial markets but lacks political savvy. Rubin wasn't helped by his top international specialist, Under Secretary Lawrence Summers, who was unwilling to provide Congress with details of the rescue plan.