[Congressional Record Volume 141, Number 17 (Friday, January 27, 1995)]
[Senate]
[Pages S1707-S1709]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
[[Page S1707]]
IN OPPOSITION TO THE PROPOSED $40 BILLION IN LOAN GUARANTEES TO MEXICO
Mr. CRAIG. Mr. President, President Clinton outlined the many
challenges facing this Nation in his State of the Union Address.
Paramount amongst those challenges was the need to bring fiscal
responsibility back to the Congress and the Federal Government.
I appreciate the President's acknowledgement of the need to balance
our budget. In this same speech, coupled with the challenges that we
face as a nation, the President outlined his proposed action to assist
our neighbors in Mexico.
The Congress will soon be faced with a vote on whether to support
this proposal, which will provide Mexico with $40 billion in loan
guarantees. The purpose of the loan guarantees is to reschedule
overextended short-term maturities, assisting Mexico through what is
now a difficult financial situation.
With our current budgetary problems, I cannot support the exposure of
my fellow American taxpayers to the tune of $40 billion in loan
guarantees as initially proposed by President Clinton.
Mr. President, as the administration and Congress struggle with this
fiscal crisis, I am concerned that we are overlooking many important
factors. Mexico's financial situation seems to be the result of past
policy decisions, not external factors outside of Mexican control.
The Mexican Central Bank, in an attempt to hold interest rates down,
printed a huge excess of pesos. By creating excess pesos, Mexico
undermined the exchange rate and drove many investors away. The
devaluation was forced by bad monetary policy.
The mistakes made by Mexico do not give me confidence that this loan
package is a good idea. If we are asking taxpayers to risk their hard-
earned money, we must guarantee that this loan is not throwing good
money after bad. I suggest that we ask for four specific conditions:
(1) Sound money policy. This could be guaranteed by the institution
of a currency board.
(2) Guarantees that tax policy will be pro-growth and wage and price
controls will be eliminated.
(3) Reasonable and adequate collateral.
(4) Full disclosure of how the moneys raised under the guarantee are
disbursed.
Mr. President, the problems in Mexico are not new, and they are
certainly not simple. Therefore, in an effort to further review this
problem, members of the Senate Steering Committee invited several
speakers to provide more-in-depth information. Those speakers included
Walker Todd, Lawrence Kudlow, Steve Hanke, and Riordan Roett.
My purpose in pointing this out is to emphasize that my position on
this issue has not been formed hastily. My support of pursuing a
currency board for Mexico is not an effort to ignore the needs or
problem that Mexico now faces.
Quite the opposite. A currency board, from the information I have
reviewed, seems the most viable option to provide a solution to this
problem rather than a Band-Aid response that will provide only
temporary relief.
Mr. President, Steve Hanke, who is a professor of applied economics
at Johns Hopkins University and has researched and written extensively
on monetary policy and the use of currency boards, made a number of
cogent points which I would like to share my with my colleagues. The
simplicity of a currency board is one of its greatest assets:
A currency board is a monetary institution that only issues
notes and coins. It maintains full convertibility of that
money at a permanently fixed exchange rate with a foreign
anchor currency, such as the dollar. As reserves, it holds
assets in the anchor currency equal to 100 percent of all
notes and coins in circulation.
This requirement provides credibility for the fixed rate
because a board cannot expand the monetary base faster than
it obtains foreign reserves. Consequently, a board cannot
cause a balance of payments crisis because of a lack of
foreign reserves. Indeed, no currency board system has ever
succumbed to a balance of payments crisis.
In addition to their simplicity, currency boards have a proven
record. Professor Hanke discussed the success of currency boards in
Hong Kong, Estonia, Lithuania, and Argentina. I was especially
interested in the success of the currency board in Argentina.
That country was experiencing annual inflation rates of 2,315 percent
in 1990. In April of 1991,
President Menem of Argentina Installed a currency board.
Since the adoption of a currency board, the rate of inflation in that
country has dropped to around 3.9 percent--the lowest in Latin
America--and, the budget is virtually balanced with economic growth up
to about 7 percent. The successes in Argentina need to be very
carefully reviewed and considered as a model for resolving the problems
experienced in Mexico.
Rather than writing a blank check, I hope that this administration
will consider opening discussions with the Mexicans to review this
option.
Professor Hanke also pointed out that a currency board could be
established easily and inexpensively. In fact, language on currency
boards, included in the 1993 Foreign Operations Appropriations bill
provides that:
There is appropriated for an increase in the United States
quota in the international monetary fund, the dollar
equivalent of 8,608.5 million special drawing rights, to
remain available until expended and, among other uses,
Such funds may be used to support monetary stability in
member countries through the instrumentality of currency
boards. (Public Law 102-391, 106 U.S. Statutes at Large
1636).
In short, Mr. President, I cannot support the extension of $40
billion in loan guarantees to Mexico.
With respect to the issues of adequate collateral and full disclosure
of receipts, in my estimation these issues should be addressed fully in
this debate. The need for adequate collateral for a loan guarantee is
fairly straightforward.
I have grave concerns about accepting Mexican oil receipts as
collateral when they are previously obligated and limited--Pemex, the
National Petroleum Co.'s gross export receipts per year are about $8.5
billion.
There is an excellent discussion of this issue and the need for full
disclosure in a recently published article from The Nation magazine by
Walker Todd.
Let me add, I do not often agree with the positions raised in this
publication, but hope that my colleagues will take a moment to review
it.
Mr. President I ask unanimous consent to enter a copy of the article
in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:
[From the Nation, Feb. 13, 1995]
Mexican Handout--Bailing Out the Creditor Class
(By Walker F. Todd]
One of the most preposterous financial crimes of the
century, the official management of the 1980s developing-
countries debt crisis, is being repeated before our very
eyes, and by many of the original perpetrators to boot. As
this is written, the Clinton Administration is pushing, and
Congress seems poised to approve, a loan guarantee package
for Mexico of up to $40 billion. This is on top of hastily
arranged international credit lines worth $18 billion, most
of them guaranteed directly or indirectly by the United
States and cobbled together since Christmas.
Mexico owes the world about $120 billion (more than $160
million by some estimates), and about $58 billion of that
amount falls due this year. Hence the need for a total aid
package of about $58 billion, although it is not yet certain
that most or all of that aid will be drawn upon. One must be
exacting and clear about who the principal beneficiaries of a
U.S. guarantee of Mexico's foreign debts would be: Mexico
owes foreign--primarily U.S.--investors in stock shares and
bonds about $60 billion. Also, about $18.3 billion of the
$120 billion total is owned to U.S. banks, led by Citibank
with about $2.9 billion. With the peso down in value by one-
third and Mexico's dollar reserves dwindling, it is clear
that only a mammoth infusion of funds or forgiveness of its
debts can prevent the country from defaulting.
The original crime, now being repeated, was the profligate
lending of billions of dollars from the U.S. banking system
between 1974 and 1982 to as gaudy a band of tinpot military
dictators, kleptocratic presidents and bon vivant finance
ministers as ever graced a Connecticut Avenue diplomatic
reception, followed in August 1982 by the discovery that the
borrowers either could not or would not repay the money. But
it was not practical politics to recognize the stupidity of
the situation and call the lenders into account. No,
orthodoxy and good form required the ongoing pretense that
the loans were still good, with a host of jerry-built
solutions from the Treasury, Federal Reserve,
[[Page S1708]] International Monetary Fund and World Bank.
So, as an African economist once told me, `One class of
people borrowed the money, and a different class of people
had to pay it back.''
The I.M.F.-policed austerity regimes that were used to keep
the loan money flowing (usually only enough to pay the
interest; the principal was rarely reduced) became legendary
in developing countries during the 1980s. What did the
governing cities or international financial diplomats care if
the vanishing middle class and teeming poor of the Third
World paid the price of ``adjustment'' while the lifestyles
of the rich changed not at all?
In 1982 Mexico owned U.S. banks about $25 billion. The
dirty secret of Debt Crisis I was that foreign banks had
deposits of flight capital from rich residents of the debtor
nations that would have covered much (and in some cases all)
of the banks' claims on the debtor countries. But despite the
price paid for ``adjustment'' by the middle classes and the
poor of the developing countries, not to mention the price
paid in lost export sales to those countries by U.S.
manufacturers and farmers in the heartland, the names of the
thieves and the amounts they stole were never disclosed.
Now, by devaluing the peso, Mexico has again committed
moral (if not technical) default on its dollar-denominated
obligations. This is the principal legacy of the
administration of former President Carlos Salinas de Gortari
and his supporters in the U.S. establishment. It is doubtful
that Mexico can meet its external obligations during 1995
without either debt relief (always the right answer in
international lending problems involving developing
countries) or new loans from First World governments and
banks (the establishment's preferred solution). After the
lost decade of the 1980s, relieved only briefly in the early
1990s by the North American Free Trade Agreement financial
bubble, the Mexican people find themselves once more
confronting official demands for renewed austerity, quiet
acceptance of further reduced wages (now approximately 60
percent below 1980 levels in inflation-adjusted peso terms),
reduced possibilities for immigration to the United States to
escape poverty, and diminished prospects for renewed growth
of the Mexican economy for the foreseeable future.
But here is where the truly intolerable part begins again:
The governing elites in both countries who caused,
exacerbated or covered up this mess expect to be held
harmless, just as happened in 1982.
Secret credit lines for Mexico from the United States,
Japan and European governments amounting to as much as $12
billion were negotiated twice in the past fifteen months or
so, ostensibly to defend the peso, but it is now clear that
the only possible use of those lines would have been to
finance the flight from the peso of Mexico's governing elites
and their compatriots in the international financial system.
Amusingly, through a tripartite credit line involving Canada
as well as Mexico, which was announced publicly in April
1994, the United States essentially has agreed to lend Canada
dollars that Canada can then lend to Mexico, which further
weakens the U.S. dollar: Our own creditor now understand that
we have underwritten the foreign debts of our two neighbors.
Federal Reserve Chairman Alan Greenspan was an active
promoter of those credit lines, as well as the current
bailout effort.
The principal purpose to be served by the new Mexican
bailout package is to prevent a loss of confidence of foreign
investors in a host of other developing nations, like
Argentina. But this is a silly exercise, a true confidence
game, because now no rational investor could have faith in
Mexico's governing Institutional Revolutionary Party (PRI),
which has enjoyed so much official U.S. support in recent
decades. The Banco de Mexico, the country's central bank, was
still intervening in the Mexico City stock exchange and
rigging tesobono (treasury bill) auctions in the same week
that the bailout package was presented to Congress, a clear
indication that stability has not returned to the country's
shaky financial markets. Also, if other countries have
mismanaged their financial affairs and are courting disaster
for their currencies, there is not much that a bailout of
Mexico can do to restore investor confidence. Besides, the
prospects for repayment from future Mexican oil receipts, for
example, are somewhat limited: At current oil production and
price levels, the gross export receipts for Pemex, the
national petroleum company, are only about $8.5 billion per
year, and most of that has already been pledged to other
purposes. The time is long since past in Washington for a
repetition of the Paul Volcker-directed ``lend new money to
meet the interest payments and pretend that it is all still
good debt'' strategy of the 1980s.
Dissent has broken out in both the Republican and
Democratic parties over various aspects of the bailout. A
variety of extraneous conditions are being proposed to
sweeten the
deal: demands that Mexico loosen its ties to Cuba and crack
down on illegal immigrants to the United States (red meat
for the right), and calls for stronger enforcement of
labor and environmental protection (for the liberal left).
But what a bottom is needed is a prompt and full
disclosure of what the $40 billion bill will be used for.
The names and amounts paid for each disbursement under the
credit line should be published. If there are Charles
Keatings, Ferdinand Marcoses and M. Danny Walls lurking in
this Mexican credit mess, then the public is entitled to
know who they are and what they intend to do with the
money they receive at our expense. And if the names
disclosed prove to be those of prominent Mexicans and U.S.
banks, securities firms, mutual funds and pension fund
managers, then we should know that, too. Who knows, with
enough disclosure, maybe no one would step forward to
claim the money. But don't count on it.
Unfortunately the loan guarantees as currently proposed
cannot foster real stability in Mexico. And support for the
side agreements to NAFTA misses the point entirely.
Dissenters in Congress should insist on complete
institutional and financial reform of the Mexican government,
which might then do more to address labor and environmental
concerns. The PRI has forfeited all moral authority to
govern. President Ernesto Zedillo Ponce de Leon should invite
the two main opposition parties to join his Cabinet on a full
power-sharing basis, with all the important Cabinet
ministries going to the opposition. The PRI itself should be
dissolved.
To combat the PRI's almost unnatural hold on the affections
of many of Mexico's uneducated poor, truth commissions
independent of the PRI, like those used in Chile after
Pinochet, should be established to investigate matters like
the use of the foreign credit lines by the Banco de Mexico,
the assassinations of the student demonstrators in Mexico
City in 1968, the manipulation of the 1988 election results,
the responsibility for the assassinations of Luis Donaldo
Colosio (first presidential candidate of the PRI) and Jose
Francisco, Ruiz Massies (second-ranking official of the PRI)
in 1994, and the assassinations of journalists and opposition
activists during the Salinas regime. Also, a separate inquiry
should be mounted into the influence of drug runners and
money launderers in Mexican public life, as well as their
connections to foreign intelligence services.
As for Washington's pending actions: It once was a federal
felony under the Johnson Act for any person subject to U.S.
jurisdiction to lend money to a foreign government in default
on its loans from the United States. After 1945, however, the
act was amended to accommodate the formation of the Bretton
Woods institutions. Only international financial ``outlaws''
like the former Soviet Union China were excluded. There in
1992, during the euphoria over market openings in Russia, the
Johnson Act was quietly amended further to exempt from its
prohibitions the former Soviet-bloc countries that were not
yet of the I.M.F. and World Bank, establishing the principle
that even ``outlaws'' may now borrow money in international
financial markets. This is too bad, for as the crimes of 1982
are repeated, this time we lack a good felony statute with
which to punish the miscreants.
Mr. GRAIG. Before closing, I would like to discuss the effect of the
proposed $40 billion loan-guarantee package in my own home State of
Idaho. Mr. President, in a report released by the Department of the
Treasury titled, ``America's Stake in the Mexican Loan Guarantee
Program: A State-by-State Analysis of American Jobs Dependent on
Exports to Mexico,'' Idaho was listed with approximately 700 jobs
relating to products intended for export to Mexico.
While this number may seem negligible to some, it is not
insignificant in relation to the overall workforce of Idaho.
Therefore, one of the points that I want to emphasize is that I have
taken into consideration the impact the Mexican financial crisis and
proposed resolution of loan guarantees may have on the workers in my
State. However, jobs are not the only thing that this situation could
affect.
Mr. President, we are discussing a substantial amount of money, $40
billion from the pockets of American Taxpayers--from the pockets of
Idahoans.
The phones in my State offices and in my D.C. office have been busy
with frustrated constituents calling to tell me that they are opposed
to the blank -check approach to alleviating this problem.
Mr. President, those 700 jobs in Idaho will not be secured if
Mexico's fiscal and monetary policies do not change.
And, I am concerned that we could find ourselves 6 to 12 months down
the road with those 700 jobs in Idaho still at risk, and taxpayers
being asked to dig even deeper into their pockets. That is not a
situation that I will help to create.
In closing, let me add that our elections in November carried a clear
message from American voters that they want to see less Government.
If the United States provides Mexico with the $40 billion in loan
guarantees and allows the current policies there to continue, we will
be financing bigger
[[Page S1709]] Government and Government-controlled responses to the
monetary problems there.
Raising taxes and implementing wage and price controls were not part
of our electorate's message last year, and I am not supportive of
financing those problems in other countries.
There are options to resolving the monetary crisis in Mexico and they
need to be fully considered. I hope that we will have a full review of
this issue, and take a path that will lead toward a solution, not a
Band-Aid for Mexico.
____________________