PERSPECTIVE ON THE MEXICAN CRISIS : The $49.8-Billion Band-Aid : The U.S. support package should suffice for the immediate problem. But what if thisshock turns out to be chronic, global and systemic?

The financial crisis that has engulfed Mexico has to be understood in one of two contexts: Either it stems from problems unique to Mexico or it reflects fundamental cracks in the international system. If the former, then the solution lies in adjusting Mexican financial and economic policies, enduring a short, sharp recession while the palliative of a devalued currency works through the economy, and spreading the financial losses as equitably as possible among creditors and debtors. If the latter, then the meltdown of peso markets is only the harbinger of what could happen to other emerging markets.

In either case, the United States has an obligation to act, whether motivated by narrow self-interest or by a sense of global responsibility. But what should the United States do? Was the proposed $40-billion package of U.S. guarantees the right solution? Is the $49.8-billion financial package, including $20 billion of U.S. loans, a better answer? Will it work?

In a sense, what the United States does may not really matter. The key issue is whether Mexican President Ernesto Zedillo’s economic and political strategy will stabilize the economy. If not, no amount of support will be enough. But even if Zedillo gets it right, $49.8 billion seems too much if the problem is just Mexico, too little if it is the whole system.

At one level, the analysis is simple. Mexico has two immediate financial problems: More than $25 billion of maturing government bonds must be repaid, rescheduled or defaulted, and the private sector, buried under its own mountain of liabilities, collapsing demand and unbearably high interest rates, must put its own finances in order--repaying, rescheduling, or defaulting--in a world of investors who want less risk and higher returns.

To repay is not a realistic option (although that is what has been happening in recent weeks), nor is default. Both would mortgage the future, condemning Mexico to economic depression, which from the U.S. view would be worse than financial chaos. Sooner or later, the debt will have to be refinanced or rescheduled. The only issue is on what terms and who will bear what cost.

This is where the support plan becomes relevant. Mexico will now refinance at least part of its debts with U.S. support; without it, Mexico would have had to refinance by itself. From an economic perspective, the only difference in the outcome is the cost of the transaction. This is important, but certainly does not justify either the hysteria or the hyperbole of the past few weeks.

The systemic issues are potentially much more serious. Mexico is only the most prominent of the so-called emerging markets to have financed itself with massive amounts of private capital. Between 1990 and 1994, private inflows into developing countries totaled more than $500 billion. If this money was simply fleeing temporarily low dollar interest rates, or if it was being invested under unrealistic assumptions about the inherent riskiness of rapidly modernizing countries, then an important element of the platform on which the recent evolution of the world economy has been built is fundamentally flawed.

If that is true, then $49.8 billion is a fraction of what will really be needed. If investors need a long-term U.S. guarantee to finance Mexico, then they may eventually demand similar security in other countries.

It is far-fetched, but not implausible, that the bulk of capital going to emerging markets will someday have to be intermediated not by the commercial banks (as in the 1970s and early ‘80s) or the mutual funds and institutional investors (as in the ‘80s and early ‘90s), but by the major industrial governments and the International Monetary Fund. This is a prospect no one in Washington wants to contemplate.

The immediate crisis will gradually pass. Mexico will endure a recession, a little less severe for U.S. help. Investors will take their losses, also less severe because of the U.S. action.

However, there will be lingering consequences. This is not the first international financial crisis that the United States has been obligated to manage, nor will it be the last. However, it is the first--and hopefully the last--attempt to manage a crisis through the politically intense caldron of congressional debate and vote. Simply put, the two are incompatible.

Moreover, the debate over Mexico’s finances has echoed and amplified the increasingly nationalist and shortsighted sentiments of earlier fights over the North American Free Trade Agreement, the General Agreement on Tariffs and Trade and Proposition 187. If this discourse is a barometer of the American public’s mood, then the country’s days as a global leader are largely over, despite President Clinton’s extraordinary, if belated, leadership in organizing the massive financial package.

This crisis has revealed as starkly as possible the interdependence and the fragility of the international financial system. If relatively minor errors of financial strategy in one important but medium-sized country can shake markets so severely, then what is at risk is far greater than Mexico’s short-run financial future. If so, the real crisis is only beginning.