Mexico Moment of Truth Jude Wanniski February 16, 1995

After spending two days in Washington, I can report where the crisis stands at midday. The Clinton Administration is immobilized on Mexico. The Treasury Department seems terrified of the prospect of putting any U.S. tax money at risk. Mexican Finance Minister Guillermo Ortiz is now en route to Washington, but it’s still unclear whether the visit will conclude a deal to secure the $20 billion from Treasury’s Exchange Stabilization Fund for Mexico. It’s entirely possible Treasury’s $20 billion has joined the other $30 billion put up by the IMF and BIS as window dressing. The only way the ESF resources can conceivably be used productively is for Treasury Secretary Robert Rubin to order Fed Chairman Alan Greenspan to draw on the account to begin buying pesos. If this call were made, the markets would learn about it with a few telephone calls, the bears would scramble to cover their peso shorts and the crisis would be over. But it appears that Treasury may attempt to bypass Greenspan altogether by putting the money in an account that would not be used for direct market intervention, with the funds being used instead as a backstop for guarantees to refinance dollar-indexed tesobonos. Officials at the highest levels of Treasury are suggesting that Greenspan is being “coy” and “uncooperative.” He would have good reason. The Republican congressional leadership signed off on using the ESF only because they believed Greenspan would be at the center of the operation. If the Fed is bypassed, Congressional leaders will be outraged, and it is wholly fitting that Greenspan disassociate himself from the disaster if he cannot prevent it.

One Treasury excuse is that Mexico is the problem, in that it does not wish to have the peso bought by the Fed via the exchange stabilization fund. This is false. I have had first-hand accounts of high officials of the Mexican government stating that they would be thrilled to have Greenspan undertake the peso rescue in this fashion, but that their government is treating the problem as an unavoidable foreign policy decision by the U.S. government. I’ve learned that former Finance Minister Pedro Aspe has been ordered by Mexico’s political leaders to remain incommunicado or his political career will be forever wrecked. President Ernesto Zedillo would instantly grasp at a life-saving raft tossed to him from Washington. All it would take is a telephone call from Greenspan to Bank of Mexico director Miguel Mancera and the two central banks could go into action. I told one Fed governor this morning that the peso could be at 3.5 within 24 hours of a decision to get it there, such would be the combined power of the two central banks acting in concert. In Mexico City, the mood of the business and political establishment is one of almost complete, morbid despair, with bankruptcies and rumors of bankruptcies and swelling unemployment rolls growing by the hour. I talked last night at midnight to Robert Novak, who is in Mexico City today for meetings with government and business leaders, and he confirmed the sense of doom that Jack Kemp found last weekend during his visit to Mexico to assess the situation. Novak thus far has found nothing but enthusiasm for the idea of a Fed rescue of the peso along the lines we have described here for several weeks -- as it suggests nothing other than the monetary union which should have accompanied NAFTA all along.

The resolution, I believe, is not going to come from Treasury, but from a decision by the Republican leadership in Congress to shoulder the responsibility. Which is to say that Senate Majority Leader Bob Dole is the only man who is in a position to save Mexico. A telephone call from Dole to Rubin, or a note from Dole to Rubin, relieving Treasury of the blame if anything goes wrong with the ESF/peso rescue plan, is what it will take. Dole has, of course, been emphatic in stating an objective of 3.5, but there is nothing on the record that indicates he personally has signed off on the specific approach by the Fed to buy pesos with an activated ESF. His “agent” on Mexico, Sen. Bob Bennett of Utah, has indicated on the floor of the Senate that it is his -- Bennett’s -- wish that the ESF be used for this purpose. Sen. Al D’Amato, chairman of Senate Banking, had shied from stating this as his preference until Tuesday afternoon, when, in a floor statement, he indicated that he would support the buying of pesos to drive up its value. Dole himself has thus far held his fire, awaiting word from the field, but no word has returned. Treasury no longer appears to be taking telephone calls from Dole’s emissaries, which suggests there is no more room for intermediation. My assessment of what occurs next is based on incomplete information, because I do not know who may be advising Dole to remain aloof. There are almost certainly political advisors who are urging him to do nothing, to allow Mexico to implode, and then organize congressional investigations that will pin the blame on the Clinton Treasury. From what I know, there is plenty of direct evidence of Treasury’s complicity in engineering the peso devaluation (of course, prior to Rubin’s arrival). The hope for a positive decision by Dole to take on the responsibility for action rests upon the friends of Mexico, who count its fate higher than the outcome of a single political career. High on this list is Kemp. High also is Robert L. Bartley, editor of The Wall Street Journal, whose op-ed essay last week pointed clearly in the direction of a correct solution. On the Democratic side, we count as an ally Sen. Chris Dodd of Connecticut, chairman of the Democratic National Committee, who has responded positively to the reasoning advanced in private discussions by his Republican colleagues. In the House, Rep. John La Falce [D-NY], an aggressive player on the House Banking Committee, is on the positive side of the issue. 

In discussions at dinner last night with some of the most active supporters of Mexico, I learned that former President Carlos Salinas believes that the devaluation was completely unnecessary, and that while he does not know one way or another if the exchange rate can get back to 3.5, he believes it was a fair rate of exchange on December 20, when the government caved in to the devaluationists. At the conclusion of the dinner, the supporters present agreed to make several further pushes at the White House and on Capitol Hill to get this logjam broken. The group agreed that the most important thing that could be achieved would be for Greenspan to begin buying pesos. As soon as he shows his hand to buy 6 pesos for one dollar, the markets will know the political switch has been thrown, and that 3.5 is on the way. 

Let there be no mistake. This is the moment of truth. On it rests the fate not only of Mexico, but also of the U.S. economy, of U.S. leadership in the hemisphere, and of the power pyramid in Washington. It’s clearly a test of Dole’s leadership as well, and of those upon whom he relies for wise advice and counsel.