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Mexico takes a step out of the debt hole. Plan involves compromises, but may help other debtors

In a unique financial compromise that may help other third-world debtor nations, Mexico is moving one step closer to easing its debt burden. Mexico, the United States Treasury, and Morgan Guaranty Trust yesterday announced a plan to dramatically reduce Mexico's foreign debt burden, saving it $900 million a year.

Creditor banks would take large losses in the first quarter of 1988 but would be guaranteed that they would eventually receive a significant portion of the principal on their loans.

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Although the plan is unique to Mexico, it has major implications for the total world debt situation. ``This might be the carrot to induce the other debtors to move on the path of economic righteousness,'' says Penelope Hartland-Thunberg, of the Center for Strategic and International Studies in Washington.

Mexico, through belt tightening, has changed its economic situation in the past year. In September, it reported cash reserves of almost $15 billion, its highest ever. Exports of manufactured goods outpaced oil exports for the first time. Now, it intends to use those reserves to reduce its debt. The nation's foreign debt stands at about $107 billion, of which this plan would affect $53 billion owed by the government. About one-third of that is owed to US banks.

The new plan involves concessions on all sides. Mexico will allow the banks to turn in their existing loans for newly issued 20-year bonds, whose principal will be guaranteed by US Treasury bonds. Thus, the banks are assured of getting back their principal. The banks, however, will tender their old loans at market rates, which currently are about 50 percent of the face value of the loans. Thus, the banks will take losses up front when they trade in the loans.

The inducement for the banks is that Mexico will agree to pay a higher interest rate on the new bonds. In addition, the new loans will be securities that are listed on the Luxembourg stock exchange. Because the loans will be traded publicly, says Rodney Wagner, vice-chairman of the credit policy committee of Morgan Guarantee, ``Banks that wish to move out of Mexico loans will be able to do so.''

William Cline, a senior fellow at the Institute for International Economics, expects this financing will hold a large appeal for small banks that would like to get out of the international lending milieu. However, he adds, ``there is no guarantee that the interest will be paid on the new obligation.''

Mexican Finance Minister Gustavo Petricioli Iturbide said the new debt instrument would help the country by reducing its total debt-service costs. Throughout the debt crisis, Mexico has continued to pay interest on its debt, Mr. Wagner points out.

Mexico will be able to afford the collateral for the loans because it is buying special US Treasury bonds. These are called zero-coupon bonds because instead of paying periodic interest they are sold at a steep discount from their eventual redemption value. Thus, Morgan bankers expect Mexico will be able to buy $10 billion worth of bonds for only $2 billion.

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It is unclear how much if anything the plan will cost US taxpayers. US officials are quoted in the Wall Street Journal as saying the plan would not cost taxpayers any money. Dr. Hartland-Thunberg, however, says she believes taxpayers will ultimately pay the difference between the face value of the Treasury bond and its current cost to Mexico. This expense would take place in 20 years.

Morgan Guaranty is the agent for Mexico in this unique deal. The bank says it intends to send information packages about the voluntary program to other banks in the next few days. In sounding out other lenders, Wagner says Morgan has not received any commitments yet.

Morgan, however, said there were many advantages to banks participating in this new financing. Mexico will pay the banks a significantly higher interest rate of 15/8 percentage point over LIBOR, the London Interbank Offering Rate. Currently banks receive 13/16 over the LIBOR rate. The banks may also have tax advantages in taking the losses.

Gonzalo de las Heras, a senior vice-president at Morgan, pointed out that banks that do not participate in the deal will also benefit since the value of all Mexican debt will rise. Currently, there is a loose kind of secondary market in Latin loans. In the case of Mexico, lenders can sell their loans and receive about 50 cents on the dollar. This new financing would eventually eliminate the overhang of Mexican debt from the marketplace.

Morgan officials yesterday were noncommittal over whether the new financing could be used by other Latin countries. Many do not have the large cash reserves Mexico is using to buy Treasury bonds as collateral. ``It depends on how they want to use their foreign reserves,'' Wagner said.

Hartland-Thunberg, however, said other third-world debtors may be tempted by the Mexican arrangement because it relieves the burden of much of the debt. ``We badly needed innovative thinking,'' she says, ``and this is innovative thinking.''

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