What Does Crisis Mean For U.S.?

Here are answers to some basic questions about the Mexican loan crisis:

Q. How did Mexico get into this mess?

A. For years, both the Mexican government and the people have been spending beyond their means. The Mexican trade deficit is high and the government relies too much on money borrowed from foreigners to pay for its spending. Last December, a renewed peasant uprising in Chiapas provoked investors to get nervous, dump pesos and call their debts, causing the Mexican currency’s value to begin dropping on international markets. The Mexican government did not have enough foreign currency reserves to buy pesos and halt the decline. It had to call on its allies for help.

Q. So why is this a problem for the United States?

A. Sales of U.S. goods in Mexico could plunge because the prices of our products are soaring there. This could cost thousands of U.S. jobs as exports to Mexico slow. Also, with the peso plunging in value, more U.S. jobs could shift to Mexico because wages and production costs would be lower there. And many U.S. investors who purchased Mexican stocks or mutual funds holding Mexican stocks could lose much of their investments. There also could be political problems here if the peso remains weak because a sharp rise in illegal immigration is expected as more and more Mexicans try to get dollar-paying jobs.

Q. What are we going to do to help?

A. Originally, President Clinton wanted to extend loan guarantees of $40 billion to Mexico - much the same way the government bailed out Chrysler Corp. But Congress refused to support the idea because it would impose too much of a financial risk on U.S. taxpayers. Clinton is bypassing Congress and going right to the U.S. Treasury, using his executive power to commit $20 billion for emergency assistance to Mexico. That won’t be foreign aid or a grant. Instead, it is expected to take the form of currency swaps: The Treasury would exchange dollars for pesos with an agreement to swap them back in the future, as a way of pumping dollars into Mexican coffers.

Q. How much will this cost U.S. taxpayers?

A. There’s no direct cost. But there is a risk for the Treasury, which will be committing billions of its reserves to the proposition that the value of the peso will be stabilized in the future.

Q. What about Mexico’s other allies?

A. The International Monetary Fund and Bank of International Settlements will kick in $27 billion in loans, while the Bank of Canada is providing a $1 billion line for swapping.

Q. What will Mexico do with the money?

A. Investor confidence has been so shaken that Mexico needs to be able to commit billions of dollars to cover all its obligations if bondholders decide to take the money and run. Hopefully, that won’t be necessary. But the Mexican government has to be prepared for the worst.

Q. Is it a bailout for Wall Street?

A. Many in Congress would agree. But unlike the 1982 Mexican debt crisis, when a handful of big commercial banks was holding bad loans, this crisis has many more victims, including millions of Americans who have socked away money in bond funds for “emerging nations.” According to some estimates, U.S. investors hold as much as $100 billion in Mexican stocks and bonds.

Q. Did NAFTA cause this crisis?

A. Indirectly. During the debate over a free-trade agreement with Mexico in 1993, President Clinton and Mexico’s former President Carlos Salinas de Gortari emphasized the progress Mexico had made in opening and reforming its economy - and not its shortcomings. Salinas could have taken steps to reduce imports and pay Mexico’s soaring foreign debts, but that would have meant higher inflation and a recession.