A $3 billion line of credit being arranged for the Mexican government by Citicorp and J.P. Morgan & Co. met with sharp criticism in the financial markets this week.
As critics raised the specter of another foreign debt crisis in the making, several bankers who are often involved in syndicated bank credits declined to be interviewed, saying they want to avoid any public association with the deal.
"The line of credit could turn out to be ill-advised," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co. "It's a little early to judge the outcome of the Mexican economic program."
The $3 billion line of credit is part of an $18 billion exchange stabilization fund that the Mexican government has lined up as a method to stabilize the peso, which has fallen about 35% against the dollar in the past two weeks.
Half of the financial package is coming from the U.S. government, while the Bank of Canada is providing $1.5 billion Canadian dollars, and the Bank for International Settlements $5 billion.
Citibank and J.P. Morgan, which are said to be seeking about 10 other banks to share the credit, each has its own motives to help out, said Walker Todd, an attorney at Buckingham, Doolittle & Burroughs in Cleveland.
"Citibank has a large commitment to Mexico of new money lending that might make it worthwhile (to pursue this line of support)," said Mr. Todd, a former officer at the Federal Reserve Bank of Cleveland. Unlike all of the other big U.S. banks, Citibank never took discounted paper in the bond exchanges for Mexico.
"Citibank was taking the opportunity afforded by Federal Bank regulators in the 1980s to put aside money without a reserve." Mr. Todd estimates Citibank's exposure to Mexican debt somewhere between $3 and $5 billion.
J.P. Morgan, Mr. Todd said, has taken a lead role in debt in this region. Mr. Todd credits Morgan with making the Brady Plan, instituted in March of 1989 to reduce debt in Latin American countries, a reality.
Morgan led the way by announcing that it would take a reserve fund sufficient to fully write down developing country debt all the way to secondary-market value, said Mr. Todd.
"Clearly, Morgan and Citibank are the two leaders in this field for slightly different reasons," said Mr. Todd.
No comment was forthcoming from top executives at either bank, beyond a confirmation by Citicorp vice chairman William C. Rhodes that the deal was being arranged. J.P. Morgan followed with a terse press release to the same effect.
Critics meanwhile argued that it is futile to try to plug the hole in the sinking Mexican economy.
"We can't lend them enough money to fix it. The hole is that big," said Christopher Whalen, the chief financial officer at Legal Research International in Washington, D.C., a cross-border due diligence investigative firm.
Critics also openly wondered why banks that had gotten out of lending to Latin American countries in the 1980s would want to plunge back into a currently tenuous financial situation.
Banks that have lent in the Mexican market have said that the loans differed from those to less developed countries of the early 1980s because they were to companies rather than to governments. But the same argument cannot be raised with respect to the $3 billion credit line to Mexico.
In fact, members of the banking community at large were uncharacteristically reticent to respond to press inquiries about the deal, even on a background basis.
One expert suggested that the loan is a weak attempt to convince portfolio investors to come back to Mexico, an attempt the critic thinks is doomed to fail.
Certainly, neither news of the financial rescue nor an announced accord with labor provided any noticeable boost for the peso. Critics suggested a host of reasons for the peso's precipitous fall.
One of the most significant problems for Mexican currency has been the U.S. government's interest rate hikes. One analyst likened the problems with the Mexican government to the Orange County debacle.
In all, outspoken supporters of the financial prospects for the government were hard to find. Nevertheless, the International Monetary Fund said late Tuesday that the measures could win its financial support for Mexico.
Mr. Soifer at Brown Brothers said he was concerned about the prospects for the Mexican government.
"Clearly the public markets are not in the mood to do a bond issue right now," said Mr. Soifer, "so the banks, for better or for worse, are anteing up the $3 billion credit line."
