DON'T PANIC: HERE COMES BAILOUT BILL

By John Greenwald

The phone call reached Rush Limbaugh at his studio shortly before he went on the air at noon, but this time the person on the other end of the line was not Bob, a machinist from Dayton, Ohio, or Dorothy, a housewife from Tucson, Arizona. It was Alan Greenspan, the chairman of the Federal Reserve and the second most powerful man in Washington, calling Limbaugh to lobby for Bill Clinton's $40 billion rescue package for Mexico. The 10-min. chat, which took place four weeks ago, was cordial enough but left the folk hero of the kilohertz unmoved. As Limbaugh advised his 20 million listeners last week, ``President Clinton is very decisive in giving away our money and taking away our rights.''

It was this kind of populist blast--a picture painted by Limbaughs and cartoonists across the U.S. of a President extending a hand to Wall Street and ailing foreign countries--that convinced Clinton he had to bypass Congress altogether. With the Mexican peso sliding, only $3.5 billion left in Mexican currency reserves and financial markets throughout Latin America on the brink of collapse, the President last week invoked his executive authority to grant Mexico $20 billion in loans and loan guarantees as the centerpiece of a coordinated bailout. Following Washington's lead, the International Monetary Fund agreed to provide Mexico with a further $17.8 billion, and the Swiss- based Bank for International Settlements kicked in an additional $10 billion.

By the time Clinton acted, the political paralysis in Washington had become almost as threatening as the economic trouble in Mexico. If a plan supported by the President, the Fed chairman and the heads of both houses were rebuffed, the result ``would be perceived in the rest of the world as leadership anarchy,'' in the words of Robert Hormats, the vice chairman of international operations for Goldman Sachs. For Clinton, the overriding goal was to prevent a financial crisis whose victims could have included up to 700,000 Americans holding jobs tied to exports to Mexico. In the past six weeks, U.S. manufacturers have already sharply pared their forecasts for Mexican business; Ford chairman Alex Trotman conceded last week that his company's plans to double exports to Mexico in 1995 were now just ``a pipe dream.'' Instead, the industry expects total Mexican sales to fall by one-third from last year's total of 600,000 vehicles.

In the short term, the U.S.-led rescue saved Mexico from defaulting on $26 billion of the government's Tesobonos bonds that come due this year--a disaster that would have driven the vast majority of foreign investors out of the country and much of the rest of Latin America. With the threat of default averted, the Administration argues, Mexico can begin to restore itself to health. Says Treasury Under Secretary Lawrence Summers: ``The success of Mexico's economy now rests on Mexico.''

But that's just what disturbs many critics of the bailout, who regard Mexico as a stumble-prone country that will inevitably be back for another tourniquet. ``We're bailing out a Mexican government that has mismanaged its economic affairs for as long as I've been an adult,'' says Democratic Representative Marcy Kaptur, a leading opponent of the rescue plan.

Experts say the country that defaulted on millions of dollars in loan payments in 1982 has greatly strengthened its economy since then. It has balanced its budget three years in a row; sold off costly state-owned companies like Telefonos de Mexico, the country's largest telephone firm; and locked into place an open-market policy by joining the North American Free Trade Agreement. And even though Mexico still lacks a large, consumer- oriented middle class, business activity grew a healthy 3.1% last year.

But President Ernesto Zedillo Ponce de Leon still must reform the policies that caused the latest crisis--specifically, Mexico's reliance on foreign capital. Much of those funds fled in December when the government, unable to prop up the overvalued peso any longer, let the currency float. Now Zedillo is taking the politically risky steps of slashing government spending and jacking up interest rates to slow the economy and wean it from its dependence on ``hot money''--foreign investments in securities that can easily be dumped. Says Allen Sinai, the chief economist for Lehman Bros.: ``Mexico must swallow a recession. If the government can hang in there and people can live through a year of austerity, the economy will be on its way. But it's going to be a real test of the country.''

The problem is that crisis-weary Mexicans are already staggering under the twin blows of layoffs and an inflation rate that could top 30% in 1995. Nissan and Volkswagen both plan more than 1,000 job cuts this month, while entertainment giant Televisa has dismissed 1,500 employees, or 6% of its work force, since December. ``Most people prefer to buy food rather than cigarettes,'' says Consuelo Docal de Rojas, who owns a struggling candy and tobacco shop in Mexico City and rents out apartments above the store. ``People can't scrape up cash to cover even necessities.'' At the same time, she adds, ``all my tenants are behind on their rent.''

Part of the trouble reflects Mexico's success in opening up its once locked-tight markets to foreign goods. Under NAFTA the country accelerated its consumption of imported products ranging from shampoo to computers that drove thousands of inefficient domestic firms out of business. Now many Mexican companies can't find local replacements for foreign suppliers, whose prices have jumped as much as 50% since Zedillo devalued the peso.

To make matters more painful, the dismantling of government subsidies that saved firms a decade ago leaves today's companies unshielded from harm. Termoplasticos Inyectados, a small electrical-parts company, had been gradually winning back customers after losing them to imports for several years. But the collapse of the peso drove up the price of raw materials and brought the company's business to a standstill. ``Everything has stopped,'' says manager Ricardo Villanueva. ``If you ask me what I'm going to do, the answer is I just don't know.''

Other companies that turned lean under the pressure of foreign competition are now poised to profit from a cheap peso that lowers the price of their exports. Min-Cer, a maker of wheel and drum components for tractor-trailers, plans to export 90% of its output this year. ``We are expecting a very steep drop in domestic demand, but we're working three shifts a day for exports,'' general director Carlos de la Garza says.

Still other firms are restraining price increases to boost their share of the domestic market. One of the country's largest producers of polyester cloth plans to limit price increases to no more than 25%. ``I'm working at 100% of capacity,'' says the firm's manager. ``We don't want to leave the market unattended.''

Despite such success stories, the widespread Mexican hardship puts enormous pressure on Zedillo, a Yale-trained economist who took office Dec. 1, to ease his austerity campaign. But that would almost certainly destroy foreign confidence in Mexico's ability to regain its footing and would thus send the peso slipping again. ``This time there's no free lunch,'' says Mauricio Gonzalez, managing partner of a Mexico City consulting firm.

That was the lesson for Wall Street investors as well. What many Americans discovered last week was that for all the Beltway rhetoric pitting Wall Street against Main Street, Wall Street long ago intersected with Main Street. At risk in the region were not only U.S. banks and giant investment firms but mutual funds held by tens of millions of little-guy investors who bet their savings on double-digit yields in emerging markets like Mexico. ``This wasn't about bailing out Wall Street,'' a congressional staff member said of last week's Executive Order, ``but about mutual funds and pension funds, and that means average Americans.'' People, for instance, like Anna Stathas, 76, and Angeliki Palassopoulos, 72, who on Dec. 27 sued the La Jolla, California, office of Merrill Lynch for putting them into a Mexican fund. Their suit charged that they lost nearly half the $73,000 they invested after Merrill Lynch failed to warn them of the risks. (The firm says the fund's prospectus clearly stated the risks.)

In making his case, however, Clinton was not helped by the fact that he entrusted the job of winning votes in Congress to ex-Wall Street whiz and newly appointed Treasury Secretary Robert Rubin. The former co-chairman of Goldman Sachs knew many of Mexico's leading industrialists (his business contacts included Telefonos de Mexico; cement giant Cemex; and Banco National de Mexico, the country's largest bank). But after two years as head of Clinton's National Economic Council, Rubin knew little about lobbying Capitol Hill. Although Treasury had prepared a state-by-state analysis of how a Mexican meltdown would affect U.S. employment, for example, most members of Congress never learned of its existence. Moreover, Clinton and top aides like White House chief of staff Leon Panetta were focused on the President's Jan. 24 State of the Union message and failed to give Rubin much support.

Congress, meanwhile, managed to achieve its own paralysis. ``The reality is members of Congress didn't want to do this,'' an Administration official says. ``And the reality is also, if you question them closely, they didn't want it to fail. And so we had this conundrum of, How do you pass something that can't pass, which everyone wants to succeed?''

Not until last Monday, the day Clinton had set as the deadline for congressional approval, did the White House acknowledge that it would have to go it alone. ``The Administration relied on [House Speaker] Newt Gingrich's saying he was for it,'' says a Democratic congressional leader, ``and they relied on him for everything after that.'' But when neither Gingrich nor anyone else could deliver, Clinton, Rubin and Panetta huddled in Panetta's White House office at 11:30 p.m. to complete work on the executive action. Clinton arrived from a dinner of the National Governors Association still dressed in a tuxedo and promptly helped himself to the Domino's pepperoni-and-mushroom pizza that Panetta and Rubin had ordered. Meanwhile, Treasury Under Secretary Summers was dispatched to contact IMF officials to win their support for the new package, a task he completed at 5 a.m.

In the end, the package got a bittersweet reception in Mexico. While Mexicans were thankful for the money, many expressed embarrassment at their country's continuing reliance on Washington. Particularly galling was the fact that Mexico pledged revenues from its oil wells, the country's proudest asset, as collateral for the loans. At a news conference last Tuesday, suspicious reporters badgered Finance Minister Guillermo Ortiz with questions about whether Mexico had made any other promises (he said no).

But the sense of discomfort stuck. ``I feel somehow as if we've sold out,'' said restaurant cook Guillermo Dehesa. So did the 74% of Mexico City residents who recently told a newspaper poll that they opposed accepting American aid. Nor did many Mexicans seem to want foreign investors back. ``Flight capital has turned into vampire capital that has severely bled our economy,'' said a statement from Mexico's manufacturing chamber of commerce. ``We must banish it and never depend on it again.'' Whatever impact the bailout finally has on Mexico, the era of fevered investment in emerging markets has cooled.

--Reported by James Carney and Suneel Ratan/Washington, Laura Lopez/Mexico City and Joseph R. Szczesny/Detroit

-QUOTE-

"This was about mutual funds and pension funds, and that means average Americans."

"Flight capital has turned into vampire capital that has bled our economy"

With reporting by JAMES CARNEY AND SUNEEL RATAN/WASHINGTON, LAURA LOPEZ/MEXICO CITY AND JOSEPH R. SZCZESNY/DETROIT