Clinton bypasses Congress, moves to rescue the peso

THE BALTIMORE SUN

WASHINGTON -- President Clinton, fearing a Mexican financial catastrophe, gave up on persuading Congress to rescue the peso yesterday and instead tapped the U.S. Treasury on his own for a new $20 billion aid package.

Mr. Clinton said he had concluded that congressional action, if it came, would be too late to prevent serious damage to American exports, jobs and the financial stability of the Western hemisphere.

"The risks of inaction are greater than the risks of decisive action," Mr. Clinton said in a speech to the nation's governors.

"Do I know for sure that this action will solve all the problems? I do not. Do I believe it will? I do. Am I virtually certain that if we do nothing it will get much, much worse in a hurry? I am."

The president switched gears Monday night after a day of strong public statements failed to prevent a further slide in both the peso and congressional support for the rescue package. House Speaker Newt Gingrich, a supporter of the loan guarantees, told White House Chief of Staff Leon E. Panetta that the proposal "wasn't going to fly," a senior administration official said.

By the time this view was confirmed by other congressional leaders in a meeting with the president early yesterday, the administration had put together a fallback package: $20 billion for loans or loan guarantees from the Treasury's Exchange Stabilization Fund, set up to bolster currencies, plus $10 billion from the International Monetary Fund and $5 billion from the Bank for International Settlements. Mexico will put up as collateral revenue from Pemex, the national oil company.

This new infusion brought to $47.5 billion the amount put up by the three institutions. Together with $1 billion from Argentina and Brazil and another $1 billion from Canada, the package won the endorsement of congressional leaders and brought immediate relief to Mexican currency and stock markets, Wall Street and the value of the U.S. dollar.

The peso gained almost 9 percent, virtually erasing Monday's losses, and was trading at 5.75 to the dollar late yesterday. The U.S. dollar was up sharply against the German mark and the Japanese yen. The Dow Jones Industrial Average gained 11.78 points, and the yield on 30-year Treasury bonds was 7.7 percent, down from 7.76 percent on Monday.

Treasury Secretary Robert E. Rubin said "the likelihood is very high" that the package would prevent a further slide.

The Mexican Finance Ministry said the president's move "fully meets the objective of stabilizing financial markets."

An international banking official said, "This at least should be enough not to make the situation worse and will give Mexico the breathing space it needs." But the same official cautioned that market fluctuations are unpredictable, adding: "Psychology becomes reality sometimes."

And some experts in Washington had misgivings about the package's long-term effectiveness.

"You fix confidence problems with confidence," said Robert Zoellick, a Treasury official under President Reagan. "I like to believe it will give a boost [to the financial markets], but the way the package was arrived at is not going to increase a general sense of confidence."

"It's going to make the patient last two to three months," said Guillermo Calvo, director of the Center for International Economics at the University of Maryland College Park. "Then the situation will become very complicated." If bondholders balk at refinancing Mexican loans, he said, "In the worst scenario, you may bail out [Mexican] domestic banks with American money."

Mr. Clinton's inability to get Congress to support him on an issue of major importance to the economy and the nation's standing in the world reverberated among economists and diplomats.

"The real story is the failure of the president and Congress to get together and act on a problem that affects substantial U.S. economic interests," said Jeffrey Schott of the Institute for International Economics.

Mexico's financial crisis became an international problem in December when its government sharply devalued the peso, triggering a run on the Mexican currency that ate up much of the government's reserves of foreign money.

For the United States, which has seen trade with Mexico increase markedly since the 1993 signing of the North American Free Trade Agreement, the crisis threatened U.S. jobs and investments in Mexico. In addition to Wall Street financial houses, the investors include pension and mutual funds in which many middle-income Americans have placed their money.

The Clinton administration initially looked into the possibility of taking the kinds of steps announced yesterday without seeking congressional approval. But the IMF was unable then to come up with a big enough share, and the administration concluded that even $20 billion from the Treasury wouldn't be enough to bolster market confidence.

The original $40 billion loan-guarantee arrangement was designed to be impressive enough to persuade investors that the United States would take any steps necessary to shore up the peso.

But the proposal ran into political problems on Capitol Hill, both among Democrats who had opposed the free-trade agreement with Mexico and among Republicans who saw it as a foreign giveaway. Members of Congress tried to attach conditions, some of which were unacceptable to the Mexican government.

On Sunday, Mr. Rubin and Mr. Panetta talked to Mr. Clinton after he returned to the White House from church, apprising him of the eroding support. On Monday, meetings on Capitol Hill dragged on all day. Liberal Democrats wanted to attach environmental and working-condition requirements that they lost on during the NAFTA fight. Meanwhile, Republicans wanted assurances from Mexico on everything from immigration and drug enforcement to cutting off that country's trade with Cuba.

On Monday evening, Mr. Panetta spoke with his counterpart, the chief of staff to Mexican President Ernesto Zedillo.

"He told me some banks might very well go under in the next few days," said Mr. Panetta.

Treasury Department officials worried that, if Mexican banks defaulted on their loans, the fallout would hit U.S. banks. It was only then that administration officials switched to Plan B, according to senior White House aides.

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