[Congressional Record Volume 141, Number 21 (Thursday, February 2, 1995)]
[Senate]
[Pages S1975-S1979]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                     THE CLINTON BAILOUT OF MEXICO

  Mr. HELMS. Mr. President, our offices in Washington and North 
Carolina have been inundated with calls protesting President Clinton's 
decision to bypass Congress and, more importantly, Mr. Clinton's 
willingness to ignore the emphatic will of the American people. In any 
event, that is what Mr. Clinton has done with his unilateral $20 
billion bailout of Mexico.
  I have opposed this scheme from the very beginning because it will do 
nothing to remedy Mexico's internal problem and it is unfair to 
American taxpayers. Last week, I presided over in-depth hearings by the 
Foreign Relations Committee. Witness after witness warned the President 
not to violate the will of the American people in this matter.
  Mr. President, if this were as important as the President would have 
us believe, then Congress should debate the bailout and vote on it, up 
or down, for or against. Before the taxpayers' money is put at risk, 
however, the people being forced to foot the bill should have a say. 
The $20 billion in question is an enormous amount of money. It is more 
than the annual budget of the State of North Carolina; it is larger 
than the annual budgets of 16 of the 18 States represented on the 
Foreign Relations Committee.
  I am not convinced that refusal to bailout Mexico would be the 
disaster that the administration has described. Many topflight 
economists say the same. The Mexican people are already suffering, a 
condition that will improve only with solid political and economic 
reform, not as the result of a bailout.
  Mr. President, on several occasions between 1980 and 1994, Mexico 
used dollars drawn from a special line of credit at the United States 
Treasury. The United States has also aided Mexico with bridge loans, 
bank credits, currency swaps, and guarantees, all to shore up 
confidence in Mexico. Assistance from Uncle Sam usually has come right 
around election time in Mexico. Credit lines from the United States and 
other countries, amounting to as much as $12 billion, were negotiated 
twice in the past 15 months alone.
  With the exception of last week's hearings narrowly focused on the 
peso crisis, the Senate has not held hearings on the situation in 
Mexico since 1986. Since the President is obviously willing to risk 
saddling the taxpayers with $20 billion of debt, I believe Congress has 
a fundamental obligation to examine carefully the political and 
economic situation in Mexico and the administration's policy toward 
Mexico.
  Mr. President, the Mexican Government has a credibility gap, and for 
obvious reasons. Just one example: There are some 2,000 United States 
claimants protesting Mexico's refusal to pay about $19 billion owed 
under a little-known 1941 treaty--the Treaty on Final Settlement of 
Certain Claims--which provided for settlement of longstanding disputed 
property claims. The United States fully met its obligations by 1948, 
but Mexico broke its promise. The Mexicans signed the treaty on the 
dotted line knowing full well that it was never intended that Mexico 
would compensate these Americans. To this day, not a dime nor a peso 
has ever been paid to an American claimant.
  Mexico doesn't hesitate to break its promises to the United States, 
much less to violate United States policies. For example: Mexico is 
giving aid and comfort to Fidel Castro by investing in Cuba's economy, 
notwithstanding the United States trade embargo. According to Cuba 
Report, published by the Miami Herald, the Mexicans are financing 
Cuba's telephone company to the tune of $1.5 billion, And, by the way, 
the Cuban phone company is a confiscated United States business. Also, 
a Mexican-Cuba joint venture will invest $100 million in a Cuban oil 
refinery. The dominant member of this venture will be Pemex, the 
Mexican's Government-owned oil company.
  The Mexican Foreign Minister was quoted by the January 27 Financial 
Times as saying that ``the typical U.S. politician is not necessarily 
someone who is very conscious of international subjects. Even supposing 
they know where Mexico is * * * they lack information about what 
happens in Mexico.''
  Mr. President, this is the same fellow who came to Washington with an 
outstretched hand pleading for cash.
  Mexico's international debt stands at $180 billion. According to the 
United States Treasury Department's own estimate, the Mexican debt 
coming due in 1995 alone--both public and
 private sector debt--is more than $80 billion. What Mexico sorely 
needs is to get at the root causes of its problems so that it will 
cease to require emergency intervention by the United States taxpayers.

  Mr. President, Mexican President Zedillo has a tough road to travel: 
He must solve the short term economic crisis; provide for a long-term 
economic stability; end a civil uprising; address corruption; stop drug 
trafficking, and initiate political reforms. Properly addressing these 
issues is what's needed to shore-up investor confidence.
  Mexico would be better off letting the markets set the value of the 
peso and Mexican stocks and bonds. The U.S. Government has no business 
bailing-out private or public investors who lose money on highly 
speculative investments.
  In testimony last week before the Foreign Relations Committee, 
experts 
[[Page S1976]] recommended that Mexico eliminate its wage and price 
controls; reform its banking industry; increase the pace of 
privatization and further open their oil company and other State-
controlled entities to foreign investment, and then tighten its fiscal 
and monetary policies.
  A bailout of Mexico is bad policy. It may provide some illusory short 
term relief, but it fails to address the root causes of Mexico's woes. 
We've been told that the imposition of any conditions, such as: First, 
drug trafficking controls; second, extradition of Mexican citizens 
involved in United States crimes, and third, resolution of all 
outstanding claims against Mexico by United States citizens--these 
conditions are too politically sensitive for the Mexicans. It might 
hurt somebody's feelings. But, I for one, wonder why the Mexicans seek 
United States financial aid with one hand, while they sustain Fidel 
Castro's brutal dictatorship with the other.
  It boils down to this, Mr. President: When an American taxpayer gets 
a loan from his local bank to buy a house, the property is security for 
the loan, as Uncle Sam doesn't cosign the note. Yet, that is exactly 
what Mr. Clinton is proposing, namely that the United States sign the 
$20 billion note.
  In my judgment, the United States and the Mexican Governments are 
perpetuating an unhealthy situation in which Mexico has grown dependent 
on us to fix its financial problems. It's bad for Mexico and it's 
unfair to the American taxpayers. This is the seventh time since 1982 
that the United States taxpayers have bailed-out Mexicans and have 
rewarded wealthy bankers who have made bad loans.
  The American taxpayers should not be placed at risk in bailing-out 
Wall Street bankers and speculators, particularly since the Federal 
Government has already run up a 4 trillion, 800 billion dollar debt 
which our grandchildren and their grandchildren will have to pay.
  Mr. President, on January 18, I sent the administration 35 questions 
about the proposed bailout. I ask unanimous consent that the responses, 
which I received 8 days later, be printed in the Record at the 
conclusion of my remarks.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                         Questions and Answers

       Question 1. Is the Secretary of the Treasury prepared to 
     recommend to the President that he explain, in writing, to 
     the U.S. Congress the urgency and necessity of authorizing 
     $40 billion in loan guarantees to Mexico? If so, has such a 
     recommendation been made or when can it be expected?
       Answer. The President addressed the urgency and necessity 
     of obtaining legislation authorizing a loan guarantee 
     facility in his January 18 remarks at the Treasury Department 
     and in the State of the Union. And he wrote to the bipartisan 
     leadership on January 19.
       Question 2. What specific conditions will the United States 
     require of the Government of Mexico in order to ensure that 
     we are repaid?
       Answer. Mexico will pay substantial fees upfront to more 
     than cover scoring costs.
       Mexico will provide backing in the form of proceeds from 
     oil exports in the event it can't meet its obligations.
       Mexico will be required to agree to strong economic 
     conditions and comply with them during the period that the 
     guarantees are made available.
       These conditions will focus on the monetary and fiscal 
     policies necessary to restore growth and thereby generate 
     resources to repay its obligations.
       We will prepare and transmit to Congress reports at least 
     quarterly on Mexico's compliance with the conditions as set 
     out in the legislation and elaborated in consultations with 
     Mexican officials.
       Question 3. What specific economic structural adjustments 
     will the United States require of Mexico?
       Answer. Mexico has implemented a number of structural 
     changes in its economy over the past decade, notably the 
     liberalization of trade restrictions, the privatization of 
     state-owned enterprises, the establishment of an independent 
     central bank, and the restoration of some balance to public 
     finances. Mexico has announced its intention to undertake 
     further structural changes, including further privatization 
     steps. Progress in making these reforms will be taken into 
     account in extending the guarantees.
       Question 4. Will each and every condition be made public? 
     If not, will Members of Congress be able to obtain 
     information on those conditions.
       Answer. The legislation will itself stipulate many 
     conditions. Conditions established in the agreement 
     negotiated between the U.S. government and Mexico prior to 
     the issue of guarantees will be provided to Congress if 
     appropriate on a confidential basis.
       We also intend to prepare and transmit to Congress reports 
     at least quarterly on Mexico's compliance with the conditions 
     as set out in the legislation and elaborated in consultations 
     with Mexican officials.
       Question 5. How was the $40 billion figure arrived at as 
     the appropriate amount to deal with the current situation?
       Answer. A substantial amount of Mexican debt will mature 
     over the next 12 to 18 months. This includes public and 
     private external debt as well as the dollar-indexed 
     Tesobonos. We believe that $40 billion provides a reasonable 
     safety net to be used to refinance maturing debt that is not 
     being rolled over. The amount of $40 billion will convince 
     the market that Mexico will have more than adequate resources 
     to meet what we view as a short-term liquidity problem.
       Question 6. Will the $40 billion in guarantees cover both 
     principal and interest?
       Answer. Under the guarantee arrangement with Mexico, the 
     coverage will be up to 100% of principal and interest.
       There are a number of U.S. Government guarantee programs 
     which provide full coverage of principal and interest. These 
     include the Israeli guarantees administered by USAID.
       We will be charging the Mexicans substantial fees for this 
     full guarantee coverage. These fees will move than cover the 
     budget costs of the program, effectively reduce the exposure 
     of the United States Government, and encourage the Mexicans 
     to limit the use and coverage of the guarantees.
       Question 7. What does the Treasury calculate to be the 
     total risk to the United States should the Government of 
     Mexico default?
       Answer. We think the risks to U.S. taxpayers are small even 
     if Mexico defaults.
       Mexico will pay substantial fees upfront to more than cover 
     scoring costs.
       Mexico will provide backing in the form of proceeds from 
     oil exports in the event it can't meet its obligations.
       Mexico will be required to agree to substantial economic 
     conditions and comply with them during the period that the 
     guarantees are made available.
       These conditions will be designed to ensure that these 
     proceeds of the guarantee are used prudently.
       Question 8. Will an authorization of $40 billion do the job 
     of stabilizing the situation? Is this the last time the 
     Administration will need to come back to Congress for loan 
     guarantees for Mexico?
       Answer. We believe $40 billion will be sufficient to 
     restore stability, and in fact, we think it is highly 
     unlikely that Mexico would use the entire $40 billion of 
     guarantee authority.
       Mexico has a liquidity problem that can be overcome in a 
     relatively short period of time. We anticipate that Mexico 
     will be able to return to private capital markets and borrow 
     in its own name within a relatively short period of time.
       With these guarantees and an appropriate economic program, 
     we do not anticipate a need to return to Congress to request 
     additional guarantee authority.
       Question 9. In Administration briefings to Congress on the 
     peso crisis, U.S. officials have stated that economic 
     policies and decisions made by former Mexican President 
     Salinas are directly responsible for the current crisis. 
     Given this, does the Administration continue to support 
     President Salinas to head the World Trade Organization?
       Answer. The United States supports the candidacy of former 
     President Salinas to head the World Trade Organization. As 
     President of Mexico, Salinas led his country through a 
     successful process of economic reform and trade 
     liberalization. He also represents a bridge between the 
     developing world and the industrialized nations.
       The issue of whether the Mexican government should have 
     devalued or not is a highly technical issue where economists 
     disagree. The decision not to devalue does not disqualify 
     former President Salinas. We continue to believe he is the 
     best candidate for the job and is well-qualified to take on 
     the challenges facing the global trading system.
       Question 10. Please describe in detail all fees that will 
     be incurred by the Government of Mexico in order to secure 
     the guarantee. What will be the amount charged for each fee 
     category? How is the fee amount determined?
       Answer. The fee will have three components: commitment 
     fees, basic fees, and supplemental fees.
       The commitment fee will be set as a % of total guaranteed 
     authority.
       The basic fee will be set to correspond to the U.S. budget 
     scoring cost as determined by OMB and CBO under the current 
     scoring system. It will be paid when each guarantee is 
     issued.
       The supplemental fee will be set by the Secretary of the 
     Treasury to ensure that Mexico return to private capital 
     markets as soon as possible.
       These fees will more than offset any estimated budget costs 
     to the United States Government.
       Question 11. Will the Government of Mexico be able to 
     borrow against the loan guarantees in order to pay the fees 
     mandated in any stabilization program?
       Answer. Yes.
       [[Page S1977]] Question 12. What amount of collateral does 
     the Treasury Department believe is sufficient to protect 
     against the risk should the loan guarantees be used by the 
     Government of Mexico? How was the amount of the collateral 
     determined?
       Answer. Treasury and Mexico will establish the oil proceeds 
     facility to provide protection for the total potential U.S. 
     exposure under the guarantee program--dollar for dollar.
       Question 16. What steps has President Zedillo taken to 
     alleviate the crisis since the situation began in December?
       Answer. The initial action taken by President Zedillo was 
     to renegotiate the PACTO, a tripartite (government, business, 
     and labor) agreement that sets economic objectives, including 
     wage increases, inflation and economic growth.
       The Mexican Government also announced plans to reduce the 
     growth of credit issued by the development banks and to 
     accelerate the privatization program.
       The Mexican Government then requested the U.S. and Canada 
     to activate the swaps agreed to under the North American 
     Framework Agreement of April 26, 1995.
       As the market reaction indicated a lack of confidence in 
     the Mexican economic program this program was strengthened. 
     On January 2, President Zedillo announced additional measures 
     aimed at restoring better economic balance. These include 
     plans to reduce government budget expenditures, to privatize 
     still more government-owned facilities. And to conduct a more 
     stringent monetary policy.
       At this time, the establishment of a $18 billion facility 
     was announced. This included $9 billion from the United 
     States split equally between the Treasury and the Federal 
     Reserve, and $1.5 billion from the Bank of Canada, $5 billion 
     from a consortium of central banks organized under the 
     auspices of the Bank for International Settlements, and $3 
     billion from a group of private banks.
       The Mexican Government also announced its intention to 
     negotiate a Stand-by agreement with the International 
     Monetary Fund. Negotiations are ongoing regarding the 
     stabilization measures that Mexico will put in place under 
     this agreement.
       Question 17. What steps did the United States Government 
     take in December to stabilize the peso?
       Answer. The United States activated its $6 billion swap 
     facility and then temporarily increased it to $9 billion. We 
     did not intervene in the foreign exchange market, nor were 
     there any drawings on our swap facility during December.
       In early January, the Mexican government announced that it 
     had made initial drawings from the Treasury and Federal 
     Reserve swap facilities.
       Question 18. What is the Treasury Department's position as 
     to requiring, as part of a stabilization package, a 
     commitment by the Government of Mexico to create a currency 
     board or some other mechanism that will guarantee the 
     independence of the monetary authority?
       Answer. The most important thing for Mexico to do in the 
     short-term is to put in place tight, effective controls on 
     credit and money. There are lots of ways to do this, and we 
     are looking at the alternatives with the Mexican authorities 
     and the IMF.
       Currency boards have worked well in certain circumstances, 
     such as in Hong Kong. But they are controversial, and they 
     cannot substitute for the need to put in place a credible and 
     effective economic program. In addition, they require a 
     substantial cushion of reserves, which Mexico now lacks.
       Question 19. What is the current amount (in dollars) of 
     both official and commercial debt that Mexico owes the United 
     States or U.S. institutions?
       Answer. As of September 1994, reported U.S. private and 
     public debt claims on Mexico total $44 billion. These 
     include: claims on Mexico of U.S. based banks of $21 billion, 
     short-term claims held by U.S. non-banks of $4 billion, U.S. 
     holdings of Mexican bonds of $18 billion, and U.S. official 
     agencies' credits of $1 billion. (These figures do not 
     include U.S. holdings of stocks or U.S. direct investment, 
     which are substantial.)
       Question 20. What is the current amount (in dollars) of 
     Mexico's international reserves?
       Answer. As of January 6, the Banco de Mexico's 
     international reserves were $5,546 million.
       Question 21. What is the amount, in dollars, of Mexico's 
     ``short-term obligations'' that are now coming due?
       Answer. Mexico faces maturity obligations in 1995 totalling 
     approximately $81 billion. This sum includes both the 
     external debt of the public and private sector, as well as 
     public domestic debt obligations--Tesbonos--that are linked 
     to the peso value of the dollar.
       Much of this debt will be rolled over in the normal course 
     of business. However, Mexico has been having a particularly 
     difficult time rolling over maturity Tesobonos. In addition, 
     some Mexican banks have had difficulty rolling over maturing 
     debt.
       Question 22. What is the amount (in dollars) of gold that 
     Mexico either holds or has access to?
       Answer. As of end-June, 1994, the gold holdings of the Bank 
     of Mexico were 425,000 Fine Troy Ounces. At $380 per ounce, 
     the value would be $161.5 million.
       Question 23. What is the estimate of flight capital from 
     New Mexico over the past twelve months?
       Answer. Flight capital is inherently difficult to measure. 
     The general consensus of economic experts on Mexico is that 
     Mexico's balance of payment from problem resulted more from 
     the drying up of foreign portfolio investment than capital 
     flight. According to the Federal Reserve, which uses World 
     Bank standard methodology, capital flight may have totaled 
     $8-$10 billion in 1994.
       Question 24. What steps will the United States insist upon 
     to end flight capital?
       Answer. The only enduring way is to restore confidence of 
     domestic and foreign investors in the economic policies and 
     exchange rate of Mexico. The measures that Mexico takes to 
     stabilize its economy--stringent monetary policies and 
     attractive real interest rates, are aimed at restoring 
     confidence.
       Question 25. What specific assurances can the Treasury 
     Department give to the Congress that no loan guarantees 
     provided by the United States will be used to subsidize or 
     otherwise underwrite Mexican commercial transactions that 
     negatively impact on U.S. national interests, including 
     Mexican debt-for-equity swaps with Cuba?
       Answer. The Government of Mexico has indicated that it is 
     prepared to make specific assurances that these loan 
     guarantees would not be used to subsidize or otherwise 
     underwrite the types of transactions with Cuba raised in the 
     above question.
       Question 26. As the situation presently confronting Mexico 
     is also faced by other developing countries, is the 
     Administration prepared to propose similar stabilization 
     plans should other nations find themselves facing a situation 
     similar to that confronting Mexico?
       Answer. Mexico is unique in terms of its strategic 
     importance to the U.S. The U.S. and Mexico share a 2,000 mile 
     border, rapidly growing trade and economic ties, and growing 
     prosperity. And, the crisis in Mexico presents a unique risk 
     of contagion to other emerging markets.
       We will be exploring ways that international financial 
     institutions are prepared and can respond to similar 
     situations in the future.
       Question 27. What other countries or international 
     institutions will be involved in providing financial support 
     to Mexico in response to the crisis? What specific steps are 
     being taken by the U.S. government to secure international 
     cooperation?
       Answer. Canada is already providing about $1.5 billion 
     Canadian dollars (approx. U.S. $1 billion) in swap credits. 
     The central banks from other industrialized countries, under 
     the auspices of the Bank of International Settlements, are 
     arranging about $5 billion for Mexico.
       The International Monetary Fund is arranging a sizable 
     credit in support of a program with Mexico. Mexico is 
     proceeding to negotiate with the World Bank and the Inter-
     American Development Bank additional loans, which will 
     provide Mexico with a considerable amount of foreign exchange 
     this year.
       We are now in the process of encouraging other countries to 
     join the effort.
       Question 28. Has the Administration considered requiring 
     the Government of Mexico to make progress in solving and 
     bringing to justice those responsible for the recent 
     assassinations of prominent Mexican political candidates and 
     officials as a condition for authorizing loan guarantees?
       Answer. In his inaugural address, President Zedillo said 
     that the Mexican people were not satisfied with the results 
     of the Government's inquiries into the killings of 
     presidential candidate Colosio, political party leader Ruiz 
     Massieu or Catholic Cardinal Posadas. He pledged that justice 
     will be served.
       Zedillo instructed his Attorney General, a member of the 
     conservative opposition PAN party, to intensify efforts to 
     resolve these crimes. The Attorney General, in turn, 
     appointed a special prosecutor to investigate these cases. 
     The special prosecutor has already held public news 
     conferences to discuss the status of his inquiries.
       In these circumstances, we consider that conditioning 
     authorization of loan guarantees on specific progress would 
     be inappropriate.
       Question 29. How much does the Treasury Department estimate 
     U.S. companies/businesses have lost in Mexico since the 
     current situation began?
       Answer. We have no reliable estimate on losses.
       We have a substantial stake in Mexico, which has already 
     been adversely affected by the financial crisis.
       There is $40 billion of exports at risk, which support 
     700,000 jobs.
       The U.S. has $53.1 billion in foreign direct investment.
       U.S. investors hold $36.5 billion in Mexican bonds and 
     equities.
       Question 31. Will Mexican economic reform efforts and 
     austerity programs lead to a tighter monetary policy, higher 
     inflation, and high unemployment in Mexico? Has the Treasury 
     Department made projections as to the inflation and 
     unemployment rates in Mexico for 1995 and 1996?
       Answer. The Mexican authorities have announced plans for 
     tightening marcoeconomic policy in 1995, and are in the 
     process of working with the IMF on a macroeconomics 
     stabilization program. These policy steps include a monetary 
     policy stance that will be considerably tighter in 1995 than 
     it was last year.
       Inflation in Mexico--which was in single digits in 1994--is 
     expected to be considerably 
     [[Page S1978]] higher this year, reflecting increases in 
     prices of imports following the recent sharp depreciation 
     value in the peso. The tightening of policy, as well as the 
     international support program, is intended to keep a price-
     wage spiral from getting underway and ultimately return 
     Mexico to a lower inflationary path.
       The financial problems in Mexico can be expected to lead to 
     recession and higher unemployment in Mexico in the next year. 
     The Mexican authorities have taken steps to contain as much 
     as possible the wage pressures that are likely to be felt in 
     the aftermath of the peso depreciation. To the extent that 
     these efforts are successful, employment losses will be 
     reduced. The international support program, by averting a 
     protracted crisis and a potential collapse in Mexican 
     economic activity, should help minimize the rise in 
     unemployment associated with the nessary Mexican adjustment.
       Treasury has not made projections for Mexican inflation and 
     unemployment for 1995 and 1996.
       Question 32. Would higher inflation and higher interest 
     rates make it more difficult for Mexico to repay any loans 
     backed by U.S. loan guarantees? Would such economic 
     conditions increase the likelihood of default by Mexico?
       Answer. Yes, higher inflation if sustained and especially 
     if accelerating, would impede the efficiency of the Mexican 
     economy and make it less attractive to foreign investors. 
     Both outcomes would undermine the peso and make it more 
     difficult for Mexico to service its external debt, including 
     that backed by U.S. loan guarantees.
       The international support program is aimed at ensuring that 
     Mexican reforms continue in a stable macroeconomics setting. 
     The program will allow the Mexicans to make the necessary 
     adjustments with a lower inflation rate than otherwise would 
     be the case and in a political environment that would not 
     jeopardize their reforms. Restoration of a stable economic 
     and political environment will reduce the likelihood of 
     default by Mexico.
       Question 33. As the Mexican economy contracts, what is the 
     Treasury Department's estimate as to the reduction in U.S. 
     exports to Mexico? And what will be the impact on U.S. 
     employment?
       Answer. We have no precise number because the answer 
     depends on many factors which are unknown.
       One that is particularly important is the length of any 
     decline because the growth gap compounds over time.
       That is why restoring stability to the Mexican situation is 
     so important.
       The U.S. exported over $40 billion in 1993 (estimated to 
     reach $50 billion in 1994.) representing 700,000 jobs.
       Question 34. What is the Treasury Department's position on 
     requiring an economic stability assessment (e.g., inflation, 
     unemployment, current account balance ratios, ect.) for any 
     nation with which we are considering opening negotiations on 
     a trade agreement?
       Answer. There would be no problem in compiling data. Such 
     information is widely available and would be easy to collect 
     in the context of considering trade agreements.
       However, there is no common denominator for movements in 
     these indicators or the relation to benefits that the U.S. 
     derives from engaging in trade.
       Our trading partners are diverse--in terms of economic 
     development, structure, and performance.
       Question 35. What is the Treasury Department's assessment 
     as to whether there is a banking crisis looming in Mexico, as 
     some analysts have projected?
       Answer. The banking system in Mexico has been adversely 
     affected by financial developments in Mexico in a number of 
     ways. Credit lines to Mexican banks have come under pressure, 
     making funding more difficult. The capital ratios for Mexican 
     banks are likely to have declined, since as a result of the 
     devaluation, the peso value of dollar-denominated assets has 
     risen, while the banks' capital remains unchanged in peso 
     terms. Finally, to the extent that recent developments have 
     increased the financial difficulties of some Mexican firms, 
     banks are likely to suffer from increased loan losses.
       However, foreign banks will be given greater opportunities 
     to invest in the Mexican banking system, which should help 
     strengthen the banking system both in capital and management.
       If the U.S. loan guarantee proposal for Mexico is approved, 
     it should help mitigate the risks to the Mexican banking 
     system.
                    backing for the u.s. guarantees

       The United States guarantees will be backed in two ways by 
     Mexico.
       First, the Mexican commitments to the United States will be 
     backed by the full faith and credit of the Mexican 
     Government. This is a legal commitment by the Mexican 
     Government to repay the securities issued under U.S. 
     guarantees. The United States will only issue the guarantees 
     on the condition that the Mexicans adopt a strict economic 
     and financial program to help ensure that the Mexican economy 
     has the resources to meet these obligations. In addition, the 
     Mexican commitment to repay will be backed by Mexico's 
     revenues from oil exports. (Mexico exports about $6.5 billion 
     of oil each year.) The United States would have access to 
     these revenues in the event of non-payment by the Mexican 
     Government. The revenues would flow to the United States 
     Government through a four step process based on irrevocable 
     instructions:
       1. Before a guarantee is given, Mexico's oil company, 
     PEMEX, will instruct its foreign customers to deposit the 
     payments for their oil purchases in a PEMEX account in a 
     commercial bank in the United States. Such payments will 
     begin on the first day when Mexico could be in default on its 
     payment obligations on its guaranteed securities.
       2. If Mexico fails to make an interest or a principal 
     payment on its guaranteed securities, the oil proceeds will 
     be automatically transferred from the PEMEX account in the 
     U.S. commercial bank to a Mexican government account at the 
     same bank.
       3. These proceeds will be automatically transferred again 
     to a Mexican government account at the Federal Reserve Bank 
     of New York (FRBNY).
       4. The FRBNY will then have access to these funds and can 
     use them to reimburse the United States for any amounts it 
     had paid out on its guarantee, plus interest. In other words, 
     the funds would be transferred to the United States to 
     compensate for any payments made by the U.S. under the 
     guarantee.
       This mechanism has been put in place several times before 
     by Mexico and Treasury for loans extended to Mexico. However, 
     it has never been activated because Mexico has always paid 
     off its loan obligations to the United States government.
                       existing pemex commitments

       Question. Has any PEMEX oil already been ``pledged'' to 
     anyone else?
       Answer. Mexico earns about $6.5 billion from oil exports 
     each year.
       PEMEX crude oil exports are subject to three existing 
     financing arrangements with non-Mexican banks. Under these 
     arrangements, in a worst case scenario, PEMEX would be 
     obligated to pay roughly ten percent of one year's proceeds 
     of Mexican oil exports.
       PEMEX has also entered into an oil proceeds facility with 
     the United States and Canada to back up the drawings under 
     the swap lines established by the North American Framework 
     Agreement.
       This facility is currently backing up the $1 billion that 
     Mexico has drawn this month.


                    former oil facility arrangements

       Question. Has this oil facility arrangement been put in 
     place before?
       Answer. Yes, on five occasions since 1982.
       However, oil proceeds have never been transferred because 
     Mexico has always paid off its loan obligations on time.


                       constitutional obligations

       Question. Are there any Mexican constitutional restrictions 
     on control and ownership of PEMEX that could undermine this 
     arrangement?
       Answer. No. There are constitutional restrictions on the 
     foreign ownership and control of PEMEX, but they do not 
     affect the ability of PEMEX commit its resources to the 
     United States Government under this facility.
       This mechanism has been put in place on five prior 
     occasions, and Mexican government attorneys have always 
     issued legal opinions stating that the mechanism is fully 
     consistent with Mexican law.
                         possible pemex evasion

       Question. Is there any way that PEMEX could get around its 
     obligations to the United States government in the event of a 
     non-payment by the Mexican government under a guaranteed 
     security?
       Answer. We are making this facility as air tight as 
     possible.
       Mexico has agreed that PEMEX will issue irrevocable 
     instructions to all of its existing foreign customers to have 
     dollar payments routed to a commercial bank in the United 
     States. Under these instructions, these payments would 
     automatically flow to the New York Federal Reserve Bank in 
     the event of a default.
       This provides excellent protection because the funds will 
     be in the United States.
       If PEMEX wants to sell oil currently sold to a U.S. company 
     to an alternative foreign customer, PEMEX would have to 
     secure our agreement in advance.
       If Mexico failed to make payments on the guaranteed 
     securities, and PEMEX were to violate its obligations, Mexico 
     would lose all access to the international financial 
     community and face serious adverse consequences in its 
     relationship with the United States.


                             full backing?

       Question. Does the oil facility provide us full dollar 
     backing for our maximum exposure?
       Answer. Yes. The facility provides full dollar backing for 
     our maximum exposure.


                          mexican oil reserves

       Question. How much oil does PEMEX have?
       Answer. Estimates of Mexican oil reserves range from 25 to 
     50 billion barrels.
       Assuming that 50 percent of Mexico's oil is exported at $10 
     a barrel, PEMEX's total potential export oil revenues could 
     range from $12 to $250 billion.
       In 1994, PEMEX earned approximately $6.5 billion from crude 
     oil exports and $1 billion from oil product exports.


                         u.s. legal protections

       Question. What legal protections does the United States 
     have in the oil proceeds facility?
       Answer. The United States has strong legal protection 
     through the recognized banker's 
     [[Page S1979]] right of ``set off'' against Mexican oil 
     proceeds in the New York Federal Reserve Bank (FRBNY).
       This means that the FRBNY has access to the Mexican oil 
     proceeds and can use them to reimburse the United States for 
     any amounts it had paid out on its guarantee, plus interest.
     

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