clarinews@clarinet.com (BOB WEBSTER, UPI Business Writer) (02/08/90)
WASHINGTON (UPI) -- Treasury Under Secretary David Mulford defended Wednesday the historic debt-reduction agreement between the United States and Mexico, rebuffing critics who say the deal did little to trim actual Mexican debt. The deal, the first of the so-called ``Brady Plan,'' of which Mulford was a principal architect, was signed Sunday in Mexico City. Treasury officials said the deal will cut Mexico's total external debt by $15 billion to $80 billion at the end of this year, from $95 billion in 1989, and will help spur Mexico's beleaguered economy. The landmark agreement restructures more than 85 percent of the debt owed by Mexico's banks. Bank debt will be cut by about $7 billion through debt reduction bonds, and a debt-equity swap will retire as much as $3.5 billion worth of debt by 1992. In announcing the deal, Treasury Secretary Nicholas Brady told Mexican President Carlos Salinas de Gortari the agreement forever removes ``from the backs of the Mexican people,'' the burden of $42 billion in debt payments. ``The reason this deal is important is because it is regarded as a turning point for Mexico,'' Mulford told a subcommittee of the House Banking Committee. Critics contend the deal will leave Mexico's debt virtually unchanged during the next two years and will cut its foreign interest payments by less than $1 billion annually. Shafiqul Islam, a senior fellow on the Council on Foreign Relations, told the panel that the Brady Plan package gives Mexico only 40 percent of the interest relief and 20 percent of the new money that the World Bank thought Mexico needed nine months ago to spur economic recovery. ``One thus cannot help feel somewhat bewildered that President Salinas and the international financial community are celebrating a debt accord that will do no more than help move Mexico from being `a severely indebted country' to a less `severely indebted country','' Islam said. ``It's always easy to say a good program isn't good enough,'' said Rep. Jim Leach, R-Iowa, who likened the Brady Plan to the Marshall Plan that was used to rebuild Europe after World War II. Without the Brady Plan deal, Mulford said, Mexcio's total debt by 1992 would increase by about $24 billion. The deal also frees about 4 percent of Mexico's gross domestic product for investment and lends stability to Mexico's economic and investment climate. Mulford also defended the price of the 30-year zero-coupon Treasury bonds used by Mexico as collateral for the debt reduction and debt service bonds. Critics termed the Treasury bonds a $300 million subsidized gift to Mexico. ``The simple and honest response is that the pricing of the zero-coupon bonds represented no subsidy to Mexico,'' Mulford said. The bonds carried a 7.925 percent interest rate, below the 8.05 percent average borrowing rate for 30-year notes as of Jan. 5. ``Pricing zero-coupon bonds is complicated by a number of factors,'' Mulford said, adding that the Treasury had only issued non-marketable zero-coupon bonds twice before and had little price-setting guidance. He also deflected reports that Treasury officials exerted undue pressure upon major U.S. commercial banks to paticipate in the Mexican debt reduction plan. ``There has been one basic message to banks -- this is a voluntary program for them but we do expect them to paticipate,'' Mulford said. ``We don't take the view that there's an option to do nothing.'' He said no pressure was applied on banks to participate in upcoming Brady Plan deals with Costa Rica and the Philippines, whose debt will be structured differently than the Mexican transaction.