Dollar, Mark -- and Peso


In Spain, it is scandal; in Italy, budget woes; in France, socialism; in Britain, stagflation; in Sweden, huge deficits. But in the United States it is Mexico, and in Mexico it is Mexico, and everywhere in the world financial markets it is Mexico.

In a risk-averse world where risk is ubiquitous, there is constant search for safe haven. Today that safe haven is Germany. Its currency, the mark, is riding high (Deutschemark ueber Alles) while the dollar and most other leading currencies are falling. The plunging peso is culprit de jour.

Will the $20 billion U.S. support package for Mexico announced yesterday inject a little more stability in global exchange rates? No one knows, including the international financiers with most at stake. So far, nothing has worked since Mexican President Ernesto Zedillo floated the peso in December only to see it sink at a sickening rate.

In the intervening two months, due in part to a loss of political will on Capitol Hill, there have been plenty of pronouncements but not much action. Now the international community needs to move quickly to restore some calm through a $50 billion plan that includes the $20 billion in U.S. loans.

Despite plentiful problems elsewhere, the tough, painful, politically risky burdens will fall primarily on a Mexican government already bedeviled by armed rebellion by Indians in Chiapas, political revolt against the ruling party and raging inflation that is killing business and causing social unrest.

So far, the most dramatic concession by Mr. Zedillo is the surrender of sovereignty over Mexican oil revenues. So long as this crisis lasts, all petroleum export earnings ($7 billion a year) will pass through the Federal Reserve Board of New York before going to Mexico. In that way, the U.S. will have access to Mexican assets in case of default.

Americans should understand how wrenchingly traumatic this concession is for Mexicans. Ever since the sainted President Lazaro Cardenas nationalized the oil industry on March 18, 1938, throwing out 17 American and British companies in the bargain, oil has been the very symbol of Mexican nationalism. President Cardenas' son, a leader of the leftist opposition today, is likely to be unforgiving. So will many of his compatriots.

In addition to this move, the Zedillo government is letting interest rates rise as high as necessary -- currently 50 percent! -- to keep pace with inflation. Borrowing a leaf from the Pinochet era in Chile, it is indexing loan principal to inflation, thus keeping real interest rates reasonably in line.

Poor Mexico faces almost certain recession, which in turn will curtail U.S. exports by an estimated $10 billion, which in turn will cost many American jobs. Yet this is no time to lose faith in NAFTA or in the economic reforms that have liberated so much of the Mexican economy. Yes, the Mexican crisis is dragging down the dollar as well as the peso, and adding to world financial instability. Yet the response should not be panic but bold, hard, austere measures to put things right.

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