February 22, 1995 in Nation/World

Mexico, U.S. Agree On Financial Bailout $20 Billion In American Loans To Be Secured With Oil Revenues

Journal Of Commerce

Mexico agreed Tuesday to U.S. conditions for a financial bailout package which will pump up to $20 billion in U.S. treasury funds into Mexican bonds and other securities to boost the peso and reduce interest rates.

Three weeks after the U.S. plan was announced by President Clinton and following days of delay, officials from the two governments nailed down the final details of four separate agreements after a long weekend of negotiations.

Meanwhile, in Mexico City, the government reiterated its commitment to a floating exchange rate for the peso by announcing its support for the creation of a futures market for the peso at the Chicago Mercantile Exchange. Mexico’s central bank also announced a policy of attempting to index interest rates according to inflation - a policy used successfully by Chile.

The conditions for the U.S. loans generally require that Mexico control its money supply, reduce publicsector spending and use emergency funds from the United States and other lenders only for the approved purposes of reducing debt or assisting private banks in Mexico.

Yet, the decision on when these terms have been violated will be left to the exclusive discretion of the Treasury Department, and officials there said there would be no hard targets or limits for inflation, growth or the value of the peso.

To secure the loans, Mexico agreed to an unprecedented arrangement in which all revenue from oil exports will pass through a U.S. commercial bank and the U.S. Federal Reserve in New York. If the U.S. Treasury determines that Mexico is in default on the loans or otherwise violating the conditions of the loan agreements, it will be able to block remittance of that oil money.

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