[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.