Alarmed by Congress' apparent reluctance to appreciate the urgency of the Mexico situation, Mr Clinton left little doubt that only immediate action would stave off calamity, possibly just days away.
Having failed to push a $40bn US aid package through Congress, which had driven international markets into deep despondency early yesterday, Mr Clinton declared that he would use his executive powers to pledge $20bn from the US stabilisation fund, which does not need Congressional approval. The shortfall is to be more than made up by increased international support.
The International Monetary Fund will pitch in with $17.5 bn, adding $10bn to its already-pledged $7.5bn, while the Bank for International Settlements is expected to provide a short-term lending facility of $10bn, with a further $3bn from commercial banks. "We cannot risk further delay," Mr Clinton told the National Governors Association. "Because Congress cannot act now, I have worked with other countries to prepare a new package."
While the markets took heart from the prospect of a looming crisis narrowly averted, the aid package did not banish longer-term concerns. "Although the new plan is likely to stabilise Mexico's financial crisis, the longer-term outlook for the economy remains poor," Scott Kalb of Smith Barney said. "I would be using the bounce to reduce my exposure in Mexican equities."
The IMF is to meet today on the proposal for the additional $10bn aid. Michel Camdessus, the fund's director, said the IMF would make up any shortfall if governments did not deliver the full amount. He said the IMF and the Federal Reserve would monitor developments over six months to allow Mexico to free its markets of any obstacles to convertibility, honour its commitments and make sure all needed resources were available to the Bank of Mexico.
Frank Newman, the US Treasury deputy secretary, said: "The risk of not doing anything would pose a greater risk. We've taken action because it's in the national interest. If we do not act now, there's a lot of risk for Americans."
The aid package markedly eased fears that Mexico would slide deeper into financial crisis, raising the risk of contagion to the rest of Latin America, as well as the US. Mexican shares rose an average 8.4 per cent by midday yesterday. In New York the DowJones was up 9 at 3,841 in early afternoon trading.
The package is expected to give urgent relief to Mexico's banks and corporate sector, reeling under interest rates which had soared from 14 to around 40 per cent in the turmoil surrounding the pre-Christmas devaluation of the peso and the crisis of confidence. While many banks still carry heavy bad loans, the risk of a crisis has been removed. "The banks are saying that within a month, on this sort of package, interest rates should come down significantly, allowing them to ease the pressures on asset values," said Horatio Nino of the IBCA credit rating agency in New York.Reuse content