The Scorecard

We can evaluate the relative power of each of the participants in Mexico's rescue by comparing the benefits received and the concessions made. The Mexican government was able to negotiate for time. It avoided default but agreed to an additional annual interest payment of $150 million for eight years. Mexico also accepted an IMF-imposed austerity program that has a history of undermining economic recovery and development (Girvan 1980; Debt Crisis Network 1985).

In exchange for extending the moratorium on Mexico's debt and providing new loans, the banks received profitable rates: "They raised by half a point the average they were receiving on the rescheduled debt. They got for the new money a half-point more in interest than they had received for the last big commercial loan to Mexico" (Kraft 1984, 51). Although half-point increases may not

[5] The European banks and the IMF preferred assessing 9 percent above the total exposure, eliminating the necessity of including every small and European bank to preserve the rescue project. The U.S. major banks preferred the "7 percent solution" because it required all banks to participate.

sound like a great deal, the enormous principal produces millions of dollars. Furthermore, the up-front negotiation fee of 1 1/4 percent translates into $200 million at no risk. One banker noted that most of the up-front renegotiation fee is pure profit for the banks, because "the administrative costs associated with renegotiating the loans were 'not near' the amount of the fee" (New York Times , 10 Jan. 1983, D1). The Federal Reserve conceded that up-front fees may be part of the cause of debt crises in developing countries, because they provide an additional incentive to banks to "seek out international loans in order to boost earnings immediately, and, once this has occurred, to sustain past earnings levels" (U.S. Congress, House 1983c, 134).

In addition, the U.S. banking community reasserted itself as the international heavyweight champion by winning the struggle with European banks over the so-called 7 percent solution. The final agreement with Mexico "set a precedent for similarly advantageous terms with Brazil, Argentina, and other troubled countries" (Kraft 1984, 52; New York Times , 25 Feb. 1983, D1). Above all, instead of absorbing massive losses, the banks increased their earnings under the agreement. One Federal Reserve official noted that Citibank's earnings increased by $8 million. As Angel Gurria, Mexico's public credit director, noted: "The banks did fabulously well on the deal. They played the good Samaritan and did their best business. They made 70 to 90% on their capital. Restructuring turned out to be good business for them" (Kraft 1984, 52). Indeed, several banks reported that they could earn a profit of more than $300 million in fees for renegotiating the loans of Mexico, Argentina, Brazil, and Costa Rica alone (New York Times , 10 Jan. 1983, D1).

In congressional hearings on U.S. legislation to bail out the banks' investments in Mexico, Volcker indicated that the federal government may have helped precipitate Mexico's crisis. He admitted that the interest rates on Mexico's debt were sometimes as high as 20 percent and that the peak interest rate coincided with Mexico's crisis. Yet Volcker insisted that although "there was no question that when world interest rates went up that added greatly to their [Mexico's] balance of payments problem and helped precipitate their difficulty," the Mexicans would not have been affected by the interest rates "if they [hadn't had] the debts in the first place" (U.S. Congress, House 1983a, 135–136). Volcker's

analysis ignores the banks' pressure on Mexico to borrow, federal pressure on U.S. banks to continue to lend to Mexico, and the role of the Federal Reserve in raising interest rates. His refusal to acknowledge the banks' and the United States' responsibility in creating the debt crisis in Mexico infuriated many congressional leaders, who noted the hypocrisy of bailing out the banking industry when the Reagan administration was heavily promoting laissez-faire in the business community.