Debtor’s Deal

Somehow the Washington social scene last week was lacking in the austerity that the International Monetary Fund has usually demanded from its cash- strapped borrowers. Instead, on the occasion of the annual joint meeting of the IMF and the World Bank, there were scores of parties, ranging from elegant dinners in Georgetown town houses to lavish banquets in the National Gallery’s East Building. Hundreds of guests arrived in long lines of limousines and munched golden raspberries from California, wild mushrooms from France, and smoked pheasant.

This year the attendees had something new to talk about between sips and mouthfuls. Capping weeks of tense negotiations, the Mexican government and its commercial-bank creditors agreed on the terms for $6 billion in new loans and the rescheduling of payments on nearly half the country’s $98 billion debt. It was the last piece in the $12 billion rescue package proposed by the IMF with Mexico in July to keep the Mexican economy afloat. No matter that the agreement was a day later than the IMF’s Monday-night deadline: the unusual deal was unlike any other concocted in the fund’s history.

Payments for $43.7 billion in old debts are rescheduled and are now stretched over 20 years. Interest is lowered on all the debt. The premium that the Mexicans must pay on top of the London Interbank Offered Rate, a benchmark international interest rate, has been trimmed to .81%, down from as much as 1.5%. Lower interest costs will save Mexico $300 million a year. An especially innovative part of the plan is the provision that if the world price of oil drops under $9 per bbl. and Mexico’s economic growth falls below a 3.5% annual rate next year, the IMF and commercial banks will make available up to $2.4 billion in additional loans.

The Mexican agreement is the first offshoot of the Baker Plan, named after U.S. Treasury Secretary James Baker, who proposed what he called a new “growth-oriented” debt strategy at the last IMF-World Bank annual meeting, a year ago in Seoul, South Korea. Baker had argued that the developing countries could not dig out of their hole unless their economies were given enough new money to help expand vigorously.

Mexico’s deal also marks a change in direction for the IMF, which earned a reputation as a tightfisted taskmaster under its outgoing managing director, Jacques de Larosiere, 56. The Frenchman announced two weeks ago that he would leave the fund at the end of the year for unspecified “personal and professional reasons.” His successor is likely to be Dutch Finance Minister Onno Ruding or Bank of France Governor Michel Camdessus; neither man would stray far from the IMF’s new moderate path.

Some economists believe the IMF’s influence in handling the debt crisis is weakening. They note that Brazil has refused to come to terms with the fund and has revived its economy by following its own growth-minded policies. Many applaud the change in the IMF’s philosophy. Says Fred Bergsten, director of Washington’s Institute for International Economics: “It is a new lease on life for the IMF in the management of the debt problem.”

If nothing else, the Mexican pact shows that if a country owes enough money, it has considerable clout in deciding how to pay it back. The new approach is far more appealing to the debtors, who had come to dread the IMF’s austere terms as a dark specter that failed to solve their problems and frequently stirred social unrest at home. Commercial bankers are a bit uneasy because the breaks that Mexico got may set a precedent for other big debtors. Argentina has already made noises that it wants to link the repayment of its $50 billion debt to changes in prices of the country’s grain and other products.