Brady Bonds' phaseout signals new stability, but challenges remain

By BRENDAN M. CASE / The Dallas Morning News

MEXICO CITY – Mexico will pay off its remaining Brady Bonds ahead of schedule this summer, officials announced Wednesday, symbolically ending an era of
economic woe that began when the nation defaulted on its sovereign debt two decades ago.

The Finance Ministry will pay its remaining $1.28 billion in Brady Bonds on July 28. That's all that's left of the $35 billion in U.S.-backed bonds that were issued in
1990 after negotiations with U.S. commercial banks and former Treasury Secretary Nicholas Brady.

Thanks to its investment grade rating from Wall Street, Mexico has been replacing its Brady Bonds with much cheaper debt lately, generating an estimated $1.1
billion in savings. The Brady Bonds were originally scheduled to come due in 2019.

"The substitution of the Brady Bonds by debt contracted in more favorable conditions has meant important savings in the country's foreign debt service," the Finance
Ministry said in a statement.

The payment also offers the latest sign of newfound economic stability south of the border. Once an economic basket case that lurched from one crisis to the next,
Mexico now has a manageable foreign debt load, a falling inflation rate and a stable currency.

President Vicente Fox is scheduled to celebrate the Brady Bond phaseout in a Thursday ceremony with U.S. Treasury Secretary John Snow and other dignitaries.
Mr. Snow met with Mr. Fox and Mexican Finance Minister Francisco Gil Díaz on Wednesday.

To be sure, many of Mexico's main economic challenges have yet to be tackled. Tens of millions of Mexicans live in poverty. Hundreds of thousands leave each year
to seek jobs in the United States.

Domestic debt has increased in recent years even as Mexico's $79 billion in foreign debt has fallen steadily as a percentage of annual output. And the economy has
barely grown at all lately, largely due to the downturn in the U.S. business cycle.

"The good news is that Mexico has joined the big leagues, and is now in sync with the global economy," said Gray Newman, the senior economist for Latin America
at Morgan Stanley in New York. "The not-so-good news is that it made it into an economic cycle that right now is incredibly challenging for everyone."

But Mexico's financial stability is a major achievement, economists said.

"The Brady Bond payment is an important milestone," said Raúl Feliz, a professor at the Center for Economic Research and Teaching. "Mexico's public finances are
now quite healthy."

History of debt

Mexico's debt problems are as old as the nation itself. And foreign debt has gone hand in hand with economic decline, political chaos and foreign invasions.

The nation faced debt problems soon after achieving independence from Spain in 1821. Less than two decades later, France blockaded the Gulf Coast port of
Veracruz to force Mexico to repay its debts to French citizens.

In 1861, British, Spanish and French forces landed at Veracruz after Mexico declared a two-year moratorium on debt payments. French forces stayed on for
several years, installing an Austrian prince named Maximilian as emperor.

Mexico suffered severe debt problems in the 1920s in the wake of the Mexican Revolution. In the 1930s and 1940s, it received deep discounts on its foreign debt
after negotiations with the United States.

That sparked what Mexicans now recall as an economic golden age.

"Mexican history is a history of large debt problems, with one window of low debt payments between 1942 and about 1972," said Jonathan Heath, the director of
LatinSource Mexico, a consulting firm. "That's the only period in our history in which we grew strongly for several decades."

Rescue packages

But the low debt levels didn't last. Officials began contracting more loans in the 1970s on the back of newly discovered oil reserves. In 1982, amid falling oil prices,
Mexico crashed into a debt default that seriously affected U.S. banks as well.

After a decade of debt problems and low growth, it negotiated the issue of Brady Bonds with Mr. Brady and its bank creditors in 1989 and 1990.

Mexico experienced another debt crisis in 1994, leading to a U.S.-led rescue package worth nearly $50 billion. Even so, the economy contracted sharply in 1995.

Since then, however, the country has taken important strides.

Trade boomed in the 1990s thanks partly to the North American Free Trade Agreement. Moody's Investors Service Inc. gave Mexico an investment grade rating
three years ago. Standard & Poor's later followed suit.

Now the leading challenge is to parlay stability into high growth rates. Only a swift economic expansion can boost incomes and cut poverty rates, economists said.

"Economic stability is a necessary condition to reduce poverty," said Mr. Heath. "But it won't do the job by itself."