[House Document 104-44]
[From the U.S. Government Publishing Office]
104th Congress, 1st Session - - - - - - - - - - - - - House
Document 104-44
THE MEXICAN FINANCIAL CRISIS
__________
MESSAGE
FROM
THE PRESIDENT OF THE UNITED STATES
TRANSMITTING
HIS DETERMINATION THAT IT IS NECESSARY FOR THE EXCHANGE STABILIZATION
FUND TO PROVIDE LOANS AND CREDITS WITH MATURITIES OF GREATER THAN 6
MONTHS TO THE GOVERNMENT OF MEXICO AND THE BANK OF MEXICO, PURSUANT TO
31 U.S.C. 5302(b)
March 9, 1995.--Message and accompanying papers referred to the
Committee on Banking and Financial Services and ordered to be printed
To the Congress of the United States:
On January 31, 1995, I determined pursuant to 31 U.S.C.
5302(b) that the economic crisis in Mexico posed ``unique and
emergency circumstances'' that justified the use of the
Exchange Stabilization Fund (ESF) to provide loans and credits
with maturities of greater than 6 months to the Government of
Mexico and the Bank of Mexico. Consistent with the requirements
of 31 U.S.C. 5302(b), I am hereby notifying the Congress of
that determination. The congressional leadership issued a joint
statement with me on January 31, 1995, in which we all agreed
that such use of the ESF was a necessary and appropriate
response to the Mexican financial crisis and in the United
States' vital national interest.
On February 21, 1995, the Secretary of the Treasury and the
Mexican Secretary of Finance and Public Credit signed four
agreements that provide the framework and specific legal
arrangements under which up to $20 billion in support will be
made available from the ESF to the Government of Mexico and the
Bank of Mexico. Under these agreements, the United States will
provide three forms of support to Mexico: short-term swaps
through which Mexico borrows dollars for 90 days and that can
be rolled over for up to 1 year; medium-term swaps through
which Mexico can borrow dollars for up to 5 years; and
securities guarantees having maturities of up to 10 years.
Repayment of these loans and guarantees is backed by
revenues from the export of crude oil and petroleum products
formalized in an agreement signed by the United States, the
Government of Mexico, and the Mexican government's oil company.
In addition, as added protection in the unlikely event of
default, the United States is requiring Mexico to maintain the
value of the pesos it deposits with the United States in
connection with the medium-term swaps. Therefore, should the
rate of exchange of the peso against the U.S. dollar drop
during the time the United States holds pesos, Mexico would be
required to provide the United States with enough additional
pesos to reflect the rate of exchange prevailing at the
conclusion of the swap.
I am enclosing a Fact Sheet prepared by the Department of
the Treasury that provides greater details concerning the terms
of the four agreements. I am also enclosing a summary of the
economic policy actions that the Government of Mexico and the
Central Bank have agreed to take as a condition of receiving
assistance.
The agreements we have signed with Mexico are part of a
multilateral effort involving contributions from other
countries and multilateral institutions. The Board of the
International Monetary Fund has approved up to $17.8 billion in
medium-term assistance for Mexico, subject to Mexico's meeting
appropriate economic conditions. Of this amount, $7.8 billion
has already been disbursed, and additional conditional
assistance will become available beginning in July of this
year. In addition, the Bank for International Settlements is
expected to provide $10 billion in short-term assistance.
The current Mexican financial crisis is a liquidity crisis
that has had a significant destabilizing effect on the exchange
rate of the peso, with consequences for the overall exchange
rate system. The spill-over effects of inaction in response to
this crisis would be significant for other emerging market
economies, particularly those in Latin America, as well as for
the United States. Using the ESF to respond to this crisis is
therefore plainly consistent with the purpose of 31 U.S.C.
5302(b): to give the United States the ability to take action
consistent with its obligations in the International Monetary
Fund to assure orderly exchange arrangements and a stable
system of exchange rates.
The Mexican peso crisis erupted with such suddenness and in
such magnitude as to render the usual short-term approaches to
a liquidity crisis inadequate to address the problem. To
resolve problems arising from Mexico's short-term debt burden,
longer term solutions are necessary in order to avoid further
pressure on the exchange rate of the peso. These facts present
unique and emergency circumstances, and it is therefore both
appropriate and necessary to make the ESF available to extend
credits and loans to Mexico in excess of 6 months.
William J. Clinton.
The White House, March 9, 1995.
Fact Sheet on United States Support for Mexico
I. Overview
Support
The United States and Mexico have signed agreements
implementing the $20 billion support package put forward by
President Clinton to protect United States jobs, exports,
immigration interests, and security concerns threatened by
Mexico's liquidity crisis.
Conditions
Mexico has announced an aggressive economic program which
it intends to follow in order to restore financial stability.
United States support is being extended to bolster that effort,
by enabling Mexico to meet short-term obligations and
restructure its debt.
Safeguards
These agreements set up transparency requirements,
notification methods, evaluation procedures, and other
mechanisms to safeguard United States interests. Under these
accords, proceeds from crude oil and oil product exports will
serve as assured sources of repayment of Mexico's obligations
to the United States.
II. Forms and Use of United States Support
Three forms of support
These agreements cover three forms of support for Mexico:
short-term swaps through which Mexico borrows dollars for 90
days; medium-term swaps that will extend dollars to Mexico for
up to five years; guarantees through which the United States
will back Mexico's obligations on government securities for up
to 10 years. The United States backing will convince investors
to lend money to Mexico for longer terms at lower interest
rates.
Use of support
Mexico will use the dollars the U.S. provides or the funds
raised with U.S. guarantees to retire, refinance, or
restructure short-term obligations. This will allow Mexico to
shift its borrowing to more-stable, long-term sources of
finance.
Financial plan
Mexico has developed a financial plan with which the United
States concurs that will govern how Mexico uses U.S. support to
accomplish its refinancing. Under this plan Mexico over the
coming year should refinance $16 billion of about $21.5 billion
tesobonos which remain outstanding.
Fees and charges
The United States will charge Mexico interest for the
medium-term swaps, and fees for the securities guarantees. The
fee and interest structure has been set to be appropriate cover
for all risks the United States will bear. Moreover, fees and
interest rates rise the more support Mexico draws upon, in
order to encourage Mexico to turn first to market sources of
finance. For the medium-term swaps, interest charges begin with
the 91-day U.S. Treasury bill rate to which a risk-premium of
225 to 375 basis points or more is added. The guarantees
incorporate a similar fee structure with Mexico paying the
difference between the present value of risk-free repayment
streams and streams discounted by a risk premium of 225 to 375
basis points or more.
III. Economic Conditions
Economic targets
U.S. support builds upon and adds to Mexico's commitment to
meet the rigorous monetary, fiscal, and structural policy
targets upon which it agreed with the IMF. Briefly summarized,
these targets include: pursuit of tight monetary policy with
negative real money growth, reduced government spending leading
to a surplus of 0.5 percent for 1995, further privatization and
other structural reforms.
Monetary policy
Moreover, Mexico has put forward an additional economic
policy memorandum which underlies these agreements. In it,
Mexico affirms the independence of its central bank, and the
use of monetary policy to achieve exchange rate stability and
resumption of full access to market sources of finance.
Transparency
The Bank of Mexico and the Ministry of Finance have agreed
to make publicly available key fiscal and financial data on
money and credit aggregates, international reserves, the
evolution of public sector debt, and other measures of economic
performance. This will provide a clearer picture of how
Mexico's economy is doing and whether its economic policy
targets specified in these agreements are being met.
Staged support
The United States will make the support available in
stages, as needed, subject to our determination that Mexico is
adhering to its announced policies.
IV. Safeguards
Notification requirements
The Mexicans will be required to provide the U.S. Treasury
with details about how they plan to use U.S. support any time
they seek to draw on U.S. resources. For example, Mexico would
have to specify what forms of securities would be offered with
a new tranche of U.S. guarantees, as well as how the money
raised with U.S. guarantees would be used to retire existing
Mexican obligations.
Veto power
The U.S. Treasury may deny any request for a disbursement
if Treasury determines that the use is inappropriate, or if it
considers that Mexico has not met the conditions set forth in
the agreements.
Acceleration
The United States has the right to accelerate Mexico's
outstanding obligations to the U.S. if Mexico has failed to
comply with certain key provisions of these agreements.
V. Oil Backing
Proceeds from oil exports
In the unlikely event of default, all of Mexico's
obligations to the United States under the new arrangements
will be backed by the proceeds from Mexico's crude oil and oil
products exports.
Federal reserve of New York
Upon implementation of these agreements, payments for these
exports will pass through an account of Bank of Mexico at the
Federal Reserve Bank of New York.
Set off to meet Mexican obligations
If Mexico fails to repay Treasury under these agreements,
Mexico's obligations will be set off against funds passing
through the account.
Summary of Mexican Economic Policy Actions
The Government and the Bank of Mexico have reaffirmed and
strengthened Mexico's economic program to contain the following
actions: To fulfill all commitments undertaken with the IMF in
connection with the stand-by arrangements. To respond to the
financial crisis with additional policy steps. To direct
monetary policy to the objectives of reducing inflation,
strengthening the peso, and encouraging the restoration of
spontaneous capital inflows. To that end, the Bank of Mexico:
Points out that under the law it is fully an
independent institution;
Reiterates that it will maintain an upper limit for
net domestic credit expansion of 10 billion Mexican
pesos for all of 1995;
Aims to restrain base money growth backed by credit
operations to below the rate of inflation;
Points out that short-term interest rates were raised
by 10 percentage points on February 20;
Pledges to maintain tight monetary conditions to
guarantee the substantially positive real interest
rates that are essential to a successful stabilization
effort; and
Seeks the stabilization of financial conditions and
return of confidence that will permit interest rates to
decline over the course of 1995.
To manage the floating exchange rate system, the Mexican
financial authorities:
Declare that the peso has been undervalued in recent
trading sessions.
Pledge to maintain a credit and interest rate policy
that will assure that the peso appreciates from those
recent levels;
Are prepared to use the funds available to Mexico
from the IMF and other international authorities for
intervention to prevent inappropriate exchange rate
fluctuations;
Commit to adjust credit and interest rate policies
quickly to regain foreign exchange that is spent in
intervention operations; and
Aim to develop futures and forward foreign exchange
markets.
To deal with the problems of the banking sector,
Liquidity problems will be tackled without relaxing
the credit program established by the Bank of Mexico,
and with the support of the funds available under the
U.S.-Mexico Framework Agreement.
Solvency problems will be handled in a timely and
forceful manner, using the procedures established by
law.
Depositors will be protected, and fiscal measures
will be adopted to cover the resulting costs.
To attain a public sector surplus of 0.5 percent of GDP in
1995, and take additional fiscal measures, if necessary, to
strengthen Mexico's economic program.
To accelerate structural reforms in the transportation,
telecommunications, and banking sectors.
To raise $12-14 billion from privatization and concession
operations over the next three years.
To improve the transparency of operations of the Government
and the Bank of Mexico, by introducing new publications with
timely and accurate data reporting operations and financial
statistics and by placing that information on the Internet in
the near future.
To make use of the funds provided in the U.S.-Mexico
Framework Agreement to support a speedy return to full
international capital market access.
The Utilization of U.S. Funding Under the U.S.-Mexico Framework
Agreement
Under the U.S.-Mexico Framework Agreement, the United
States will make available up to $20 billion from the U.S.
Treasury's Exchange Stabilization Fund. These funds will help
the Mexican Government move aggressively to resolve its current
financial crisis.
Significant Levels of Support
The United States Government has committed $20 billion
dollars to the Mexican support program.
$10 billion will be made available in stages between now
and the end of June 1995 as Mexico meets agreed upon targets.
$3 billion will be made available immediately on the effective
date of the agreement.
Another $10 billion will be made available as needed and in
stages beginning in July, based on the same terms and
conditions.
program Addresses Mexico's Key Financial Problems
U.S. funding will enable Mexico to meet its tesobono
obligations and successfully refinance and restructure its
short-term debt.
U.S. funding will support Mexican efforts to strengthen its
banking system, including reducing pressure derived from
maturing dollar-denominated CDs and other short-term
obligations.
U.S. Funding will Reposition the Mexican Economy
By eliminating Mexico's short-term debt problem and
strengthening the Mexican banking system, the U.S. financial
package enables Mexico to support stable exchange rates.
This plan lets Mexico gain new access to private capital
which will allow Mexico to continue to refinance less
expensively.
Funding Mechanisms Encourage Longer Term Investments
U.S. support will be available as both short- and medium-
term swaps and through a program of loan guarantees.
To date, only short-term swaps have been available to
Mexico. As part of the Agreement, the U.S. will now begin to
provide medium-term swaps as well.
The Mexican Government will also be able to use U.S. funds
to guarantee longer-term bonds. A first issue of U.S.
guaranteed bonds is anticipated during the second quarter of
1995.
Summary of Agreements
Four basic documents embodying commercial agreements
between the United States and Mexico implement the Mexican
economic stabilization package:
The Framework Agreement serves as an umbrella accord.
It broadly defines the terms and conditions for
provision of U.S. resources to support Mexican economic
stabilization. Each of the financing agreements is
consistent with the provisions of the Framework
Agreement. The Framework Agreement references the
economic policies Mexico has announced that it will
pursue, the conditions on eligibility for financing,
how satisfaction of these conditions will be
determined, how U.S. resources may be used, and how the
U.S. will be repaid.
The Medium-Term Exchange Stabilization Agreement
specifies the terms and conditions for medium-term (up
to 5 years) swap transactions between the U.S. and
Mexico. Under the agreement, for every purchase by
Mexico of dollars for pesos, Mexico will deposit a
corresponding amount of pesos in a Treasury account at
the Banco de Mexico. The agreement also specifies the
interest rate the U.S. will charge Mexico for the
swaps, which will cover the U.S. risk for the
transactions. Above specified threshold levels,
additional swap transactions will bear increased rates
of interest.
The Guarantee Agreement specifies the terms and
conditions for guarantees of debt securities issued by
Mexico. Under this agreement, no guarantees may be
issued for payments or principal and interest due more
than 10 years after issuance of the guaranteed debt
securities. The fee structure for the guarantees is
intended to cover Treasury's risk for the guarantees,
and, as in the case of the medium-term swaps, will
increase with greater outstanding use to encourage
Mexico to seek regular private sources of finance.
The Oil Proceeds Facility Agreement establishes a
mechanism to provide an assured source of repayment of
U.S. resources. Under the agreement, Petroleos
Mexicanos (PEMEX) will instruct in foreign customers to
make payments for exports of oil, oil products and
derivatives into an account at a U.S. bank. That bank,
in turn, will be under irrevocable instructions to
transfer funds to a Banco de Mexico account at the
Federal Reserve Bank of new York (FRBNY), beginning
after the effective date of the agreements. As Long as
Mexico meets its obligations, these funds will be
freely available for use by the Bank of Mexico. If
Mexico fails to repay the U.S. under any of the
financing agreements, Treasury, through the FRBNY,
would be entitled to set off its claims against the
Banco de Mexico account.