[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.


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