My life

By the time of the State of the Union, we were two weeks into one of the biggest crises of my first term. On the evening of January 10, after Bob Rubin was sworn in as secretary of Treasury in the Oval Office, he and Larry Summers stayed to meet with me and a few of my advisors about the financial crisis in Mexico. The value of the peso had been declining precipitously, undermining Mexico’s ability to borrow money or to repay existing debts. The problem was exacerbated because, as Mexico’s condition deteriorated, in order to raise money it had issued short-term debt instruments called tesobonos, which had to be repaid in dollars. As the value of the peso continued to decline, it took more and more of them to finance the dollar value of Mexico’s short-term debt. Now, with only $6 billion in reserves, Mexico had $30 billion of payments due in 1995, $10 billion in the first three months of the year. If Mexico defaulted on its obligations, the economic “meltdown,” as Bob Rubin tried to avoid calling it, could accelerate, with massive unemployment, inflation, and, very likely, a steep and prolonged recession because the international financial institutions, other governments, and private investors would all be unwilling to put more money at risk there.

As Rubin and Summers explained, the economic collapse of Mexico could have severe consequences for the United States. First, Mexico was our third-largest trading partner. If it couldn’t buy our products, American companies and employees would be hurt. Second, economic dislocation in Mexico could lead to a 30 percent increase in illegal immigration, or half a million more people each year. Third, an impoverished Mexico would almost certainly become more vulnerable to increased activity by illegal drug cartels, which were already sending large quantities of narcotics across the border into the United States. Finally, a default by Mexico could have a damaging impact on other countries, by shaking investors’ confidence in emerging markets in the rest of Latin America, Central Europe, Russia, South Africa, and other countries we were trying to help modernize and prosper. Since about 40 percent of American exports went to developing countries, our economy could be hurt badly. Rubin and Summers recommended that we ask the Congress to approve $25 billion in loans to allow Mexico to pay its debt on schedule and retain the confidence of creditors and investors, in return for Mexico’s commitment to financial reforms and more timely reporting on its financial condition, in order to prevent this from happening again. They warned, however, that risks were attached to their recommendation. Mexico might fail anyway and we could lose whatever money we had extended. If the policy succeeded, it could create the problem economists call “moral hazard.” Mexico was on the brink of collapse not only because of flawed government policies and weak institutions, but also because investors had continued to finance its operations long past the point of prudence. By giving the money to Mexico to repay wealthy investors for unwise decisions, we might create an expectation that such decisions were risk free.

The risks were compounded by the fact that most Americans didn’t understand the consequences to the American economy of a Mexican default. Most congressional Democrats would think the bailout proved that NAFTA was ill advised in the first place. And many of the newly elected Republicans, especially in the House, didn’t share the Speaker’s enthusiasm for international affairs. A surprising number of them didn’t even have passports. They wanted to restrict immigration from Mexico, not send billions of dollars there.

After I listened to the presentation, I asked a couple of questions, then said we had to go forward with the loan. I thought the decision was clear-cut, but not all my advisors agreed. Those who wanted to speed my political recovery after the crushing midterm defeat thought I was nuts, or, as we say in Arkansas, “three bricks shy of a full load.” When George Stephanopoulos heard Treasury’s $25 billion figure for the loan, he thought Rubin and Summers must have meant $25 million; he thought I was about to shoot myself in the foot. Panetta favored the loan, but warned that if Mexico didn’t repay us, it could cost me the election in 1996.

The risks were considerable, but I had confidence in Mexico’s new president, Ernesto Zedillo, an economist with a doctorate from Yale who had stepped into the breach when his party’s original candidate for president, Luis Colosio, was assassinated. If anybody could bring Mexico back, Zedillo could.