NEWS ANALYSIS : Mexico Debt Accord Won’t Guarantee Full Recovery

MEXICO CITY —  The landmark debt reduction agreement between Mexico and its foreign creditors has given President Carlos Salinas de Gortari a smashing political victory, but it remains to be seen whether he can convert this immediate success into long-term economic growth.

Businessmen and the stock market reacted enthusiastically to the long-awaited agreement, which will provide the Mexican government with an estimated $3 billion in new loans annually while at the same time cutting its debt by $10 billion to $12 billion.

“The news was like a soothing, cool shower after walking seven months and 24 days in the desert,” Excelsior newspaper editor Regino Diaz Redondo wrote Monday.

The Salinas administration, which took office Dec. 1, had been negotiating with the banks since April. The agreement reached Sunday offers commercial bankers three options to reduce the $54 billion that Mexico owes them: They may trade their outstanding loans for new 30-year Mexican government bonds at a 35% discount; trade existing loans for new bonds at the same value, but with the lower interest rate of 6.25%, or provide new money amounting to 25% of their outstanding loans to Mexico.

In Washington, U.S. Treasury Secretary Nicholas F. Brady told reporters that he received a phone call from Salinas on Monday expressing how “very pleased” he was with the agreement. The landmark accord also was the first success for Brady, who announced his debt reduction strategy last March.

But some economists noted that the Mexican government had sought a $7-billion annual reduction in its net transfer of capital for a “permanent solution” to Mexico’s debt problem. They said the deal, which only affects half of Mexico’s $107-billion foreign debt, might not provide enough relief to turn around the country’s prolonged economic crisis.

“This will pull the economy out of its stagnation and uncertainty,” said economist Carlos Ramirez, a columnist for El Financiero newspaper. “But it is not enough to bring about high, sustained growth.”

6% Annual Growth Sought

Salinas has said his goal is 6% annual growth by the end of his term in 1994. He is seeking to reduce debt payments from 6% of gross national product to 2%.

The government needs 6% annual growth just to absorb the approximately 1 million new workers who enter the labor force each year, Ramirez said.

Now, according to economists, it is up to Salinas to build on the psychological effects of the debt package. They said he must step up economic and political reforms and expand the country’s deteriorated infrastructure--the oil, electricity, telephone and transportation industries--and must make the huge state-run companies that operate these industries more efficient.

And he must do this without overheating the economy and spurring new inflation.

Economists said Salinas must resist political pressures to use the new cash flow to return to high government spending.

‘Catch-22 Situation’

“You have a Catch-22 situation,” one European economic observer said. “Everyone is saying, ‘Great job,’ and they’re ready to grow. But everyone to whom Salinas owes something will say, ‘We want our wage increase’ or ‘We want our price hikes.’ He has to tell them this is just the beginning.”

In his nationally televised announcement of the agreement Sunday night, Salinas attempted to do just that, saying that Mexicans “cannot expect to see spectacular results overnight.” He vowed to stick to a wage and price control agreement with business and labor that is valid through March.

Ramirez said the economy already shows signs of overheating, with the economy growing by 1.8% the first quarter of the year, and manufacturing production up 4.2%. Salinas, he said, must design a new anti-inflationary policy that is not based on wage and price controls.

The social compact “provided the government with a margin for maneuvering to control inflation during the debt negotiations. But the negotiations took too long and the economy is very compressed. . . . The social, political and productive cost of the pact was very high--no growth,” Ramirez said.

Salinas Urged to Slow Growth

He noted, however, that it is in the president’s political interest, as well as his economic interest, to slow growth.

“His political calendar will have him hold down economic growth until 1991, when there are congressional elections,” he said.

On the positive side, economists predicted that the multi-year debt agreement would help attract capital back into the country and encourage foreign investment. The stock market offered its vote of confidence with 3.7% rise over Friday.

Mexico’s strategy throughout the negotiation was to distinguish itself from the rest of Latin America’s debtors by stressing the radical reforms it has made in the nation’s economy.

Salinas said Mexico’s debt agreement breaks new ground for other countries to build on.

Times staff writer Tom Redburn, in Washington, contributed to this report.