WASHINGTON -- The United States and Mexico reached agreement yesterday on a broader-than-expected rescue plan that will include the use of U.S. funds to keep Mexico's private banks from collapsing, while effectively giving Washington veto power over much of Mexico's economic policy for the next decade.
The $20 billion aid program, the centerpiece of an international loan package for Mexico worth about $50 billion, is intended to restore the confidence of international investors in the Mexican economy and gradually pull the country out of its financial crisis.
The accord was signed yesterday afternoon by Treasury Secretary Robert E. Rubin and Mexican Finance Minister Guillermo Ortiz.
But the harsh austerity required to carry out the deal will impose a tremendous immediate burden on the once-booming Mexican economy -- reflected in a sharp drop of almost 5 percent in the Mexican stock market yesterday. The battered peso, after being up as much as 3 percent yesterday before the deal's announcement, slipped to close almost 1 percent lower against the dollar.
The new regimen also will be a setback to the hopes of those U.S. companies that had been counting on Mexico to continue to grow as a market for U.S. exports.
Included in the agreement are a series of stringent financial requirements, including provisions that Mexico run a budget surplus this year and clamp down on credit by charging interest rates above the soaring rate of inflation. Monday, the Bank of Mexico increased its short-term lending rate to nearly 50 percent.
Mexican officials said that the provisions would cause considerable pain to the Mexican people and acknowledged that the country could be forced into a recession. That, in turn, could fuel the country's social unrest, deepen the challenges to the weakened government of President Ernesto Zedillo, and perhaps greatly increase the flow of illegal immigrants into Texas and California.
But Mr. Ortiz and his aides said that all the alternatives to such austerity were far worse, risking greater political and financial chaos and the possibility of even larger flows of illegal aliens.
"Obviously this is not easy," a senior Mexican official told reporters yesterday. "The conditions Mexico is facing are very difficult. But there is no other way out."
At the White House yesterday, President Clinton praised Mexico's leaders for taking "some very courageous steps" and said the deal was not a bailout.
"We have very good collateral on this deal," he said, a reference to American requirements that all of Mexico's export earnings on oil be available to back the loans. "So we have done the right thing by the American taxpayers and the American people as well."
While most of the details of the agreement have been described by Treasury officials during the last few weeks, yesterday's accord also included new language that specifically permits Mexico's central bank to use American funds to support Mexico's banking system and keep its depositors -- including many wealthy Americans -- from losing billions of pesos.
Last night, Mr. Rubin said the new provision was not intended to be a bailout of the banks and their owners but rather an effort to keep the underpinnings of the Mexican economy from crumbling.
"As time went on and the situation deteriorated in recent weeks," Mr. Rubin said, "the conditions of the banks became worse, and there has been more focus on the banks among all those concerned."
While Congress does not have any direct role in the bailout package, American officials are clearly worried that this provision could generate opposition to the deal.
The administration's plan to use $20 billion in Treasury funds to aid Mexico does not require legislative approval. It was developed only after it became clear that a $40 billion American-only package would be tied up in Congress for months, and might be doomed to defeat.
"The ultimate success of this program depends on Mexico," Mr. Rubin said at the signing ceremony yesterday.
The agreement includes none of the political concessions from Mexico -- including policing of the Mexican side of the border to prevent illegal crossings -- that many in Congress demanded last month, before Mr. Clinton decided to bypass Congress.
But in a statement issued yesterday afternoon, Secretary of State Warren Christopher said there was already evidence that Mexico was acting to make "bridges and border crossings more secure" and would step up pressure on drug cartels.
The austerity requirements in the plan appeared intended to allay criticism that the administration was cutting a deal for Mexico that it would not cut for Orange County, Calif., which has filed for bankruptcy, or the near-bankrupt government of the District of Columbia.
"This is a better deal for American taxpayers than the last deal," said Sen. Alfonse M. D'Amato of New York, chairman of the Senate Banking Committee and one of the leading Republican critics of the agreement. "But it is still woefully inadequate."
While administration officials tried to head off criticism of the moves to keep the banks solvent, Mexican officials were playing down the American requirement that all revenues from the export of Mexican oil and petrochemicals must be deposited in the Federal Reserve Bank of New York.
The proceeds could be automatically seized by the United States if Mexico defaults on any of its repayments to Washington.
The heart of the deal lies in requiring Mexico to pursue an extremely tight monetary policy, shrinking the country's money supply and preventing it from spending government funds to stimulate economic growth.