WASHINGTON - The revised U.S. rescue package for Mexico demonstrates both the limits and strengths of presidential power in today's high-risk world of global finance.
President Clinton had to abandon his original proposal for $40 billion of loan guarantees for Mexico after it became clear congressional leaders could not deliver the votes, at least not without a lengthy debate and a host of conditions. One public opinion poll said 70% of those contacted objected to the loan guarantees.
As administration officials made the rounds on Capitol Hill, they could not overcome the perception that the deal put U.S. taxpayers on the hook for Mexico's problems and was a bailout for rich investors who had padded their portfolios with Mexican stocks and bonds.
Meanwhile, Mexico's financial situation was worsening by the hour. With the peso plunging and cash reserves running low, Mexico's central bank faced a collapse that could have plunged the government of President Ernesto Zedillo into bankruptcy and recession.
Fed Chairman Alan Greenspan warned Congress that investors were already taking their money not only out of Mexico but also "from a variety of widely dispersed nations - industrial as well as developing."
That was as close as he could come to warning publicly about the possibility of a global financial meltdown.
With the risks rising and Congress balking, Mr. Clinton used his executive powers to come up with a package for Mexico that did not require congressional approval.
The President's bold action took the heat off Congress and quickly shored up Mexico's financial markets.
The new package basically has the same purpose as the original program: letting Mexico restructure its debt and stretch out payments.
Short-term debt that costs the government as much as 25% will be replaced with loans and loan guarantees of three to 10 years at lower interest rates.
Mr. Clinton put up $20 billion from the Treasury's exchange stabilization fund, money that is normally held to make short-term moves in the foreign exchange market to steady the dollar. Treasury aides persuaded the International Monetary Fund to increase its assistance to $17.8 billion.
In addition, Mexico will be able to tap short-term credits of $10 billion from the Bank for International Settlements, the clearinghouse for foreign central banks, plus another $1 billion each from Canada and a group of Latin American nations.
Combined, the revised plan gives Mexico a pool of nearly $50 billion of credit, a substantial sum.
But Mexico will have to comply with a tough austerity program before any loans or loan guarantees are made available either by the United States or the IMF. Mexico will pay this country up-front fees, and in the event of default, the United States will have a legal claim on Mexico's oil revenues.
Critics of the deal should keep in mind that Mexico is going to pay a big price in terms of inflation, high interest rates, lost jobs, and a sharp slowdown in economic growth for devaluing the peso. U.S. cross-border business with Mexico is going to slump.
Financial markets will signal whether the plan works to contain the damage.
The Bond Buyer is a sister publication of the American Banker.