WASHINGTON - The high-profile U.S. support for Mexico in its current financial crisis is nothing short of extraordinary.
It began when congressional leaders from both the House and Senate stood by President Clinton in the White House as he announced that the United States was readying a package of up to $40 billion in loan guarantees to help Mexico cope with the peso's sudden devaluation.
The White House has pulled out all the stops in seeking support in Congress for the legislation that would enact the aid package. Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan have made more than half a dozen trips to Capitol Hill to explain the deal. Vice President Al Gore has also been meeting with lawmakers.
Officials at the International Monetary Fund are working with Mexican authorities to devise a standby loan linked to Mexico's economic performance. And the United States has doubled, to $18 billion, a separate short-term credit line for Mexico with the help of Canada, foreign central banks, and commercial banks.
The loan guarantees of $40 billion are clearly the controversial part of the effort to help Mexico, as well as the most important element. They would offer a friendly hand to investors in Mexican stocks and bonds who got clobbered by the peso's fall. They also promise a political boost to newly installed Mexican President Ernesto Zedillo.
But Clinton administration officials have been careful to explain that the loan guarantees are not being set up as a straight loan or any kind of gift from U.S. taxpayers. Basically, the guarantees would be used to back up fresh long-term loans by private investors to Mexico and help the country overcome a cash-flow problem triggered by the peso's drop.
In an eloquent defense of the guarantees during a meeting with business leaders at the Treasury Department, Mr. Clinton compared the guarantees to cosigning a loan. "Our interests demand it, our values support it, and it is good for our future," he said.
There is a risk of default by Mexico, but U.S. officials are seeking to minimize that risk. Mexico would have to pay a fee for the use of any guarantees, and the country's oil revenue is to be pledged as collateral.
Making sure that Mexico remains stable is vital to U.S. interests. Treasury officials estimate that a prolonged economic crisis in Mexico could send up to 500,000 additional illegal immigrants streaming across the border, mostly into Texas and California.
More broadly, the Clinton administration believes it is important to reward Mexico for opening itself up to investors, balancing its budget, slashing inflation, and privatizing state-run industries.
The one thing Mexico could not do was keep its currency strong when pesos from a flood of imports were piling up in Mexican banks.
Mexico is the first line of defense for developing nations throughout Latin America and Asia that have put their faith in markets and depend on private capital investments. The shakiness caused by Mexico's crisis spread immediately to Argentina and Brazil. Chaos in Mexico could pitch other emerging markets into blackness if investors flee.
Stabilizing Mexico stabilizes global capital markets, and democratically elected governments, in an interdependent world. The stakes are high, and the risks are minimal.
The Bond Buyer is a sister publication of American Banker.