Mexico Is Rich It Should Pay Its Bills


East Sandwich, Mass.-- Mexico is not tottering on the brink of financial collapse, despite current reporting. In the words of former President Carlos Salinas de Gortari, Mexico is an "oil . . . world power."

According to data published by the Bank of Mexico and the U.S. Department of the Interior, the Mexican government's proven oil reserves are the eighth-largest in the world. Mexico's oil reserves are 100 percent greater than those of the United States and more than 1,000 percent greater than those of the United Kingdom.

This wealth is worth hundreds of billions, if not trillions, of dollars. (Harvard's Energy and Security Research Project reports that Mexico's potential reserves could be worth hundreds of trillions of dollars.) Mr. Salinas tells us that Mexico is also a "silver world power."

And contrary to what Mexico's highly-paid public-relations specialists in Washington say, Forbes reports that Mexico is the nation with the fourth-largest number of millionaires in the world.

Mexico has the means to repay its foreign creditors. It does not need President Clinton's recently organized $50 billion bail-out package. (The loans are being dispersed in tranches -- $17.8 billion is currently available and $20 billion more will be made accessible in July.)

Mexico's attainment of the status of a world oil power exposes much of the duplicity in Mr. Clinton's loan package. In 1976, Mexico announced the discovery of vast amounts of oil reserves. It used the blessing of these sought-after-riches to borrow tens of billions of dollars from foreign commercial banks, mostly American banks.

As reported by the Bank of Mexico and the U.S. Department of the Interior, Mexico's proven oil reserves soared from about 6 billion barrels in 1975, the year before the discovery, to almost 54 billion barrels by 1987, the year its foreign commercial bank borrowing peaked. Valued at a below-market price $10 per barrel, Mexico's oil wealth increased by $480 billion. And its foreign debt increased from almost $17 billion in 1975 to more than $109 billion in 1987, or by $92 billion. Thus, Mexico's oil assets increased five times more than its foreign debt -- an enviable outcome by any financial measurement.

Despite this fabulous return on investments, Mexican officials continue to refuse to use oil reserves to service these loans and repay this capital on market terms. Instead, they have defaulted on tens of billions of dollars in principal and interest.

Earlier this year, the Mexican government was on the brink of defaulting on about $28 billion in other, short-term debt instruments held by foreigners, mostly Americans. Again, Mexican authorities could have chosen to sell off a relatively small amount of the country's massive oil reserves to honor the debt.

This threat of default is the ostensible reason for President Clinton's $50 billion loan package. That the Mexican government refused to use oil reserves as collateral raises doubt about its intent to fully repay that debt.

The argument put forth by Mexican officials and reiterated by the media is that Mexico's oil reserves bear no relationship to its solvency, because Mexicans consider every last barrel of their oil to sacrosanct, off-limits to foreign creditors. Absurd on its face, the argument also fails to explain why, if Mexicans so prize their oil reserves, they are unwilling to use their own money to pay for the requisite extraction and refinement.

Mexican politicians had considered increasing taxes to bankroll the country's state-owned oil monopoly, but did not do so in the face of strong political opposition. Thus foreign commercial banks, not Mexicans, put up the cash to build the Mexican oil monopoly. The claim that "oil is our sovereignty" is econobabble.

The U.S. Treasury assures us that the $50 billion in loans will be repaid in full, citing the fact that Mexico has pledged to deposit its oil-export revenues in an account at a U.S. Federal Reserve bank. By putting up this collateral, Treasury says, Mexican officials are demonstrating a good-faith intent to repay the money.

But Mexico's annual oil-export revenues are only a fraction of the billions being lent. Moreover, the agreement allows the Mexican government to make withdrawals from the account. As long as it stays current on the loans' repayments, the Mexican government has unrestricted access to the funds in the account.

One is left to wonder: How many months after Mexico gets its multi-billion dollar loans will the account's balance dwindle to zero?

Already both Washington and Wall Street are speculating on Mexico's need for another massive bailout after it receives that $50 billion. Since more than half of the first package's billions are intended to preclude Mexico from defaulting on other foreign debt, a second bailout may be required to ensure repayment of the first.

It is time to recognize that Mexico is solvent. It has the resources to repay its foreign creditors. It does not need President Clinton's sweetheart deal. It Mexico wants free loans, then it can reciprocate with free oil.

Janis M. Lawrence is a specialist in international lending.

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