U.S. ready to spend billions as peso prop

THE BALTIMORE SUN

WASHINGTON -- The United States is preparing to spend billions of dollars, possibly as soon as next week, to help Mexico in its financial crisis. The aid would be used to prop up the peso in foreign-exchange markets and help make payments on its national debt, people with detailed knowledge of the planning said yesterday.

The money would be in addition to the $6 billion line of credit that the United States made available to Mexico last week. It would most likely consist of U.S. loans to the Mexican government and possibly U.S. purchases of pesos in currency markets, these people said.

A Treasury Department official who insisted on anonymity confirmed that discussions were under way on providing assistance to Mexico but refused to discuss any details.

The U.S. preparations reflect the Clinton administration's assessment that Mexico is too important to the United States to be left without assistance at a time of severe economic and financial stress.

Lawrence H. Summers, the undersecretary of the Treasury for international affairs, said last night that "clearly in approaching this situation, we've recognized the central importance of Mexico to the United States because it is our second largest trading partner, because we share a 2,000-mile border and because our societies are so closely intertwined."

Underscoring the nations' intertwined economies was a sharp fall yesterday in the value of the U.S. dollar, which analysts partly attributed to the uncertainty in Mexico. The dollar posted its biggest one-day loss against the German mark in five months and also tumbled against other currencies.

"The whole region of North America has turned into a peso bloc," said Richard Koss, currency sales manager at Canadian Imperial Bank of Commerce in New York.

Bankers and analysts gave a cautious welcome yesterday to reports that the United States was preparing a multibillion-dollar aid package for Mexico. But they said that any revival of confidence in Mexico's battered currency and economy would be fragile for a long time to come.

The scale of the assistance is unclear, but it would not represent the first time the United States has helped Mexico. In 1982, Washington bought extra oil from Mexico and the Federal Reserve urged commercial banks to reschedule Mexico's foreign debt after it defaulted.

The Treasury official who spoke on condition of anonymity also confirmed rumors last night that Mexico had not yet used any of the $6 billion line of credit to support the peso. This suggests that Mexico may be waiting until the United States is ready to help in a coordinated intervention in the currency markets to drive up the peso.

The country's volatile financial markets started to calm down yesterday, with both the stock exchange and the peso improving.

The peso closed at 4.975 to the dollar, rallying by more than 14 percent from 5.70 Tuesday. The rally, which ended an eight-day slide of nearly 40 percent for the Mexican currency, was powered by a series of rumors of international assistance to Mexico.

The Mexican stock exchange also gained 2.7 percent, to close at 2,338, partly on the news that Zapatista rebels in the southern state of Chiapas had expressed willingness to resume stalled peace negotiations with the government.

In financial markets, attention has focused in recent days on Mexican government bonds falling due in the coming weeks. U.S. officials refused to give specifics about the workings of the bailout package.

But U.S. efforts to help are not directly aimed at supporting the peso or relieving Mexico of its obligations to pay off the bonds. Instead, the United States is focusing on the overall problem of making sure that Mexico has enough money to meet these short-term needs.

The understanding has been that any U.S. help would be repaid.

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