Clinton set to pour billions into Mexico as US bank shares fall

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The US is reportedly considering extending unprecedented aid worth anywhere from $25bn to $40bn to Mexico, in what would be its boldest move yet to steady the peso and stabilise the economy of its beleaguered Nafta partner.

Word of the mooted rescue scheme emerged as President Clinton consulted Federal Reserve chairman Alan Greenspan and senior members of Congress, whose approval would be needed for a package of this size - roughly double the entire $14bn US foreign aid programme for 1995.

The new assistance could come as US sovereign guarantees that would sharply lower the cost of future international borrowings by Mexico, or as direct subsidized loans. But no firm decision has yet been taken, officials here say.

Currently Washington is extending a $9bn line of credit to Mexico, half of an international $18bn package put together by the US, Canada, European central banks and a consortium of private banks. But in recent days Mr Clinton has hinted he is ready to gofurther if neccessary. Mexico, which this week drew down a first tranche of $500m, was a "bellwether for the rest of Latin America and developing countries throughout the world," he said on Wednesday.

Those words are the measure of Washington's stake in a Mexican recovery, to which is tied both the future of President Ernesto Zedillo and the credibility of Nafta as Chile prepares for negotiations to become the first South American member of the free trade zone.

They are also a calculated bid to restore confidence, and as such they appear to be working. Yesterday, for the second successive day, the Mexican stockmarket and the battered peso both moved higher.

Meanwhile, news that Mexico's bank insurance fund had made emergency loans to some banks unable to repay maturing short-term credits to foreign lenders spread fears of defaults hitting international banks, writes Diance Coyle, Economics Correspondent.

Shares in the big New York banks fell, and Citicorp's chairman John Reed was at pains to spell out that its results for the latest quarter had not been significantly affected by the crisis.

Figures published by the Bank for International Settlements today show Mexico's short-term bank borrowing at $28.4bn at the end of June 1994. Loans by international banks to the Mexican banks stood at $16bn.

The Mexican banks are thought to owe about $8bn on short term certificates of deposit. Rumours are rife that lenders are refusing to roll these over - and the bail-out by the insurance funds lends them substance.

Mr Reed said Citicorp had not suffered any serious problems because of Mexico, and did not anticipate any in future. Citibank is the only US bank to have branches in Mexico.

Together with JP Morgan, it is putting together the commercial banks' contribution to the $18bn international rescue package.

Italy risks financial disarray if a solution is not found quickly to the country's political crisis, Luigi Abete the chairman of Confindustria, Italy's CBI, warned yesterday, while the lira fell to a new low of 1,066 to the mark as markets waited impatiently for the outcome of President Scalfaro's continuing efforts to end the crisis.

Demand for marks and Swiss francs also maintained the pressure on the peseta, which traded at 87.35 to the mark, but bonds and share prices closed slightly upin Milan and Madrid.