[Congressional Record Volume 141, Number 20 (Wednesday, February 1, 1995)]
[Senate]
[Pages S1866-S1868]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                          MEXICAN PESO CRISIS

  Mr. MURKOWSKI. Mr. President, oftentimes it is not appropriate to be 
critical of a proposal unless you have a better solution. But I rise 
today to speak on the action of the administration which was announced 
yesterday regarding Mexico. In the opinion of the Senator from Alaska, 
the administration simply did an end-run around Congress and the 
American people when it unveiled its latest financing package for 
bailing out foreign investors in Mexico.
  There is no question the President has the legal authority under the 
exchange stabilization fund to provide the $20 billion in loans and 
loan guarantees to the Mexican Government. However, I am concerned that 
this establishes a dangerous precedent and represents a use of power by 
the administration that was, in my opinion, unwarranted. It should be 
noted that the potential of unilaterally using the emergency 
stabilization fund was not conveyed to many of the Members who were 
involved in working with the administration on the potential 
alternatives associated with this financial crisis.
  In any event, it has been less than 6 weeks since the Mexican 
Government reversed its longstanding policy of maintaining a pegged 
value for the Mexican peso and devalued the peso by nearly 13 percent. 
This devaluation plunged the Mexican stock and currency markets into a 
panic and a crisis that resulted in the peso dropping by more than 30 
percent in a matter of just a few days.
  It was at that point that the Clinton administration came forward and 
offered, first, a $6 billion credit line to Mexico in an effort to 
stabilize the currency. By January 3, Treasury saw fit to extend this 
line of credit to $9 billion and there were some other governments that 
came in, and commercial banks, for another $9 billion. So there was 
approximately $18 billion available for stablizing the peso at that 
time. I include the $6 billion I previously mentioned.
  When I made an inquiry to the administration about this taxpayer-
financed $9 billion credit line, I was assured that the American 
taxpayer would not be at risk because the credit line was fully 
collateralized by Mexico.
  Since January 3 we have seen the peso crisis not abate. It only got 
worse. The peso dropped 45 percent in barely 1 month. This led the 
administration to raise the specter of as much as a $40 billion credit 
line to stabilize the peso. And by yesterday, the size of the bailout 
had grown another 25 percent to nearly $50 billion, with at least $20 
billion coming from U.S. participation.
  The specifics of that participation, as indicated in a newspaper 
article, suggests that commercial banks will be in for $3 billion; 
Canada, $1 billion; Latin American countries, $1 billion; the Bank for 
International Settlements, $10 billion; the International Monetary 
Fund, $17.8 billion; and, as I have indicated, the United States 
Treasury, some $20 billion.
  Why are we putting so much taxpayer money at risk? Who are we 
defending and who are we bailing out with this taxpayer-financed line 
of credit? And how did Mexico fall into the crisis?
  Mr. President I would note that most of this debt is represented by 
bearer bonds. That means whoever holds them basically owns them. It is 
like owning a $100 bill. You can walk in and turn it into two 50's or 
five 20's. The significance of that is it is very difficult to identify 
who specifically holds those debt instruments.
  What we have learned in the last month, however, is that this crisis 
has not just happened overnight. It has been building for a year or 
more. It was clearly foreseen by the United States and Mexican 
Governments. In fact, the New York Times recently reported that United 
States Treasury officials warned the Mexican Government as early as 
last summer the country's foreign debt had become dangerously high and 
that the peso was being maintained at an artificially high level.
  But, for strictly internal political reasons, the Mexican Government 
chose to compound the crisis by continuing to print billions of pesos. 
As far as I know they were printing them yesterday. They may still be 
printing them today. Compounding the Mexican Government's mismanagement 
of its finances and its insatiable desire to maintain a strong peso and 
excessive foreign imports, the Government allowed its foreign currency 
reserves to drop from $29 billion in February to less than $7 billion 
in December.
  Now Mexico faces the daunting prospect of having to deal with foreign 
debt redemptions that are listed at approximately $80 billion this 
year, $39 billion of which is in the public sector. The significance of 
that is that is debt that is falling due this year, not all at once 
this year, but it will have to be met or refinanced this year. It is 
very likely, when the guarantees are in force, the holders of these 
notes, these bearer notes, are going to immediately want to convert 
their pesos into dollars and increase rather than decrease the capital 
flight out of Mexico.
  If you and I held bearer notes in this crisis, what would be the 
inducement to hang on if the guarantees were there and we knew we could 
be paid? A fiduciary responsibility would suggest the holder of those 
notes would run in, cash them in, and take his or her principal and 
leave the country. The only consideration that might keep them 
[[Page S1867]]  there is the attractiveness of the high interest rates. 
That rate may be in excess of 20 percent, which would certainly be an 
inducement.
  But then the question is, Who are we bailing out? And the 
administration has yet to address specifically who holds that debt. 
They say the mutual funds hold the debt. The mutual funds are 
sophisticated investors. If they make an investment mistake, should the 
taxpayer have the responsibility of bailing them out anymore than any 
other individual who makes a financial investment and looks for a 
return on that investment, and tries to measure the risk against the 
inducement which is the interest that he is generating on that 
investment?
  If the risk is too great or the investment goes sour, obviously the 
alternative is you lose your principal. But that is not what is 
happening here and that is why I am critical of this proposal.
  I think there is a growing danger that the Mexican Government will 
have to return to Washington before this year is out seeking another 
$10, $15, or perhaps $20 billion in taxpayer funds for a second 
bailout. We were told by the assistant to the President of Mexico that 
the total debt of Mexico was about $180 billion, that the current debt 
was something in the area of close to $80 billion, and now we are 
talking about approximately a $50 billion guaranteed fund.
  It is interesting to note that yesterday, Mr. Bill Seidman, former 
head of the FDIC and the RTC, in testimony before the Senate Banking 
Committee, indicated that the best way to resolve the Mexican financial 
crisis was to have the Mexican Government sit down with its creditors 
and renegotiate the terms of the loans that are coming due this year. 
He adamantly opposed a taxpayer bailout of speculators in Mexican debt. 
I believe Bill Seidman is absolutely right. Much of that Mexican debt 
carries rates of interest of 25 to 40 percent.
  Where can you get that today in the United States? You are not going 
to get it in your savings account or your mutual fund. There is 
associated risk with the attractiveness of the investment and the 
potential return. Why should the American taxpayer dollars be used to 
pay off this debt of 100 cents on the dollar plus interest when we do 
not know who those holders are, other than the gray area of people who 
bought bearer notes or mutual funds, who made these risky investments 
simply to attain a higher interest rate? If they can get the Federal 
Government to guarantee what we have done, they will be very, very 
happy with such high interest rates.
  Investors knew precisely what types of investments they were making. 
They were speculating. They were almost junk bond type of investments. 
And for American taxpayer funds to be used to guarantee this investment 
is unconscionable in my opinion.
  Mr. Seidman's suggestion is that the debtors and the creditors sit 
down, the creditors being the holders, the debtors obviously being the 
Mexican Government, to work something out. How does that work? It is 
done all the time. I was a commercial banker for 25 years. If there is 
no blood in the turnip, if your borrower cannot pay, you sit down, you 
try to work something out, and you reschedule the debt, and take 40, 
50, 60, or 70 cents on the dollar. You work something out. You just do 
not let everything collapse. We have not given this process a chance to 
work. I think we should.
  Mr. President, yesterday the administration stated that the United 
States will impose strict conditions on the assistance it provides with 
a goal of ensuring that this package imposes no costs on the U.S. 
taxpayer. As of today, I am not aware that any of my colleagues know 
precisely what those conditions are. I have been involved in the 
meetings. I would expect the administration will make those conditions 
known, and I would encourage that they make them known before a single 
American dollar is used to provide guarantees to the Government of 
Mexico.
  A factsheet released yesterday by the Treasury Department implies 
that these loans will be collateralized with the proceeds from Mexican 
oil exports. Mr. President, 2 weeks ago, I asked the Treasury to 
specifically identify how much of Pemex's revenue the Mexican 
Government has pledged, and how that revenue will be handled by United 
States financial authorities; how much of it is pledged, because 
obviously you can only attach what is not pledged but still assignable. 
I believe that it is imperative that for every dollar in loans and loan 
guarantees, the Mexican Government has to come up with some way to make 
a deposit of an equal amount of foreign hard currency in a Federal 
Reserve bank account in the United States from their oil export 
revenues.
  I think the American taxpayer must be assured that so long as there 
are outstanding United States Government guarantees of Mexican debt, 
that an amount equal to the debt is maintained under the control of our 
Government. Otherwise, we risk the real possibility that the current 
Mexican Government or succeeding Governments could renounce the 
collateral agreement with the United States and leave the American 
taxpayer holding the bag. What are we going to do after these notes are 
called, so to speak, if the guarantees have to be delivered? We do not 
have another monetary stabilization fund to go to.
  The response I received when I made an inquiry from the Treasury 
Department regarding collateralization of this debt was completely 
unsatisfactory to me. It does not appear to me that the new agreement 
will be any different, although I hope it will be. Under the previous 
draft agreement, the Mexican Government is required to turn over the 
proceeds from its oil exports only--get this, Mr. President--turn over 
the proceeds from its oil exports only in the event that the Mexican 
Government defaults on these bonds and only after such a default 
occurs. In other words, the Mexican Government would not establish an 
escrow account in the United States that can be immediately attached by 
the United States Government in the event of default. Another way of 
saying it is that there will be no collateral provided by the Mexican 
Government to offset the risk of default.
  Mr. President, if we look at the structure of this, where we can only 
call, if you will, on this process after the Government is in default, 
I assure you that the practicality of that is basically unworkable. It 
is simply naive to believe that if Mexico, after receiving some $50 
billion in loan guarantees from the United States Government and the 
IMF, faces a default on these bonds in the future, that it will have 
the political will and capacity to turn its oil revenues over to the 
United States Government. At that time, if the Government defaults, it 
is everyone for himself. The demands internally in Mexico will dictate 
that there will never be realistically a fund set up for the oil 
revenues, if indeed default occurs.
  It does not take much imagination to know that, if in the future, 
Mexico faces default on United States Government-backed bonds, the 
entire Mexican economy will surely be in political, social, and 
economic chaos that will only be exacerbated by being forced to turn 
over its oil receipts to its neighbor in the north.
  Let us be realistic. What caused this problem is too much debt. We 
have other nations that are friendly to us that have too much debt. 
Canada from the north would be the first to admit that.
  What I fear is that, if such an economic crisis were to occur in the 
future in Mexico, the United States, having already put its $20 billion 
at risk, basically, would simply have to extend further credit lines to 
Mexico in order to stave off the political crisis that will be evident 
in that country. In other words, if we start down the line of extending 
$20 billion to Mexico, we are laying the foundation for future bailouts 
that I think will put even more American taxpayer money at risk.
  Mr. President, before we extend $20 billion of credit to Mexico, we 
must have ironclad guarantees of internal economic reforms in Mexico, 
and I would like to see 100 percent collateralization of the loan.
  Finally, Mr. President, it struck me during the entire negotiations 
that the best way to have handled this would have been to propose a 
guarantee on a percentage, if you will, of the current term debt that 
Mexico is exposed to. 
[[Page S1868]]  Let us assume that we were to guarantee $40 billion of 
the $50 billion and require that the holders of the debt stay in on the 
balance, that other $10 billion. In other words, we would have been 
first out with a guarantee; the holders would have been last out. The 
explanation given as to why that was unworkable is we did not know who 
the holders of the debt were. I do not totally accept that. I think, 
had we waited, we could have forced the holders of that debt to come 
forward and make a proposal that they would stay in for a portion of 
their participation in return for the U.S. Government guarantee.
  So that was my suggestion, which was recognized but rejected under 
the explanation that it was impossible to know who the holders of the 
debt were and, therefore, they could not proceed with that kind of an 
arrangement.
  So time will tell, Mr. President, just what the risk to the U.S. 
taxpayer is. But this Senator is very concerned about the agreement 
that was made, and I felt an obligation to present my views to my 
colleagues.
  I yield the floor.
  The PRESIDING OFFICER (Mr. Bennett). Under the previous order, the 
Senator from North Dakota [Mr. Dorgan] is recognized to speak for up to 
10 minutes.

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