by Robert Rubin
The essential goal remained the same: to allow Mexico to restructure its debt from short term to long term and to implement reforms in order to reestablish financial stability and regain access to private capital. By acting on the basis of executive authority, we would avoid the problem of satisfying the immense range and number of conditions proposed in Congress. However, as under the previous proposal, Mexico would have to agree to significant policy reforms negotiated with us and with the IMF, including stronger fiscal and monetary policy, important structural measures, and fuller and timelier reporting about its financial condition. The Bank of Mexico would also be required to pay significant interest on the loans and to make revenues from oil sales available to the United States in the event of nonpayment.
This time we were even more specific with the President about the political risk. A poll published in the Los Angeles Times a few days before had showed that the American public overwhelmingly opposed our efforts to help Mexico, by a margin of 79 to 18 percent. I cited these numbers. And I stressed, once again, that the plan might not work. No precedent existed for action of this kind on this scale, and none of us could predict with substantial confidence what would happen. All the choices were bad. But the alternative to intervention remained much worse.
Despite the way opposition had solidified, Clinton’s hesitation was no greater than the first time we had gone to him, three weeks earlier. “Look, this is something we have to do,” he said. Once again I was deeply impressed not only by his willingness to take on a big political risk but by how relaxed he seemed about doing so. Leon Panetta also made the point later that Clinton seemed to welcome being able to do something difficult and important for the country on his own.
After the meeting, I went back to my Treasury office and called Alan to relate the President’s decision, which Clinton discussed with the four congressional leaders at the White House early the next morning. Because the decision was made when it was the middle of the night in Europe, we didn’t have time to consult most of our Group of Seven (G-7) allies in advance of announcing our new proposal. The next day, they were furious at Camdessus for offering another $10 billion without consulting them, and very upset with us too. Six countries were angry enough to abstain from the official IMF vote of approval. When German Chancellor Helmut Kohl met with President Clinton a few days later, he said the G-7 finance ministers were all irritated with me and that I should send them each a bottle of whiskey as a peace offering. I didn’t send any whiskey, but Larry and I did try to make amends for the lack of consultation, both over the phone and when we met our G-7 colleagues at a meeting in Toronto a week later. Relations were repaired, and all eventually endorsed the IMF program.
For me, it was the first of many experiences of dealing with the ambivalence of our allies about U.S. leadership and the difficulties of exerting that leadership effectively with sovereign states that have agendas and political needs of their own. The lesson I took from that episode was the great importance of working with other countries to build support for what we thought was the right path on international policy. Thereafter, we spent considerable time and effort consulting with our counterparts around the world, especially through a process that brought Larry together with the deputies of the other key finance ministries.
THE PESO and the Mexican stock market, the Bolsa, climbed 10 percent following our announcement of “Mexico II” on January 31. Markets in Brazil and Argentina moved in sympathy. But the respite didn’t last long. As we’d feared, some in Congress were furious that we’d made what amounted to the largest nonmilitary international commitment by the U.S. government since the Marshall Plan without their consent. And Mexican markets, realizing that Congress might not allow us to proceed, soon resumed their decline.
When I went up to Capitol Hill to testify before the House Banking Committee a week later, members of both parties blew off steam. Representative Maxine Waters (D-CA) asked whether the bondholders who would be made whole were my “Wall Street buddies.” Beyond the hearing room, the reaction was even harsher. A group of Republican freshmen in the House tried to find a way to forbid us from extending loan guarantees without congressional approval. Although Gingrich was still personally supportive, he clearly understood the political realities well enough to conclude that he couldn’t turn his caucus around.
In retrospect, it seems to me that many members of Congress probably meant to oppose us without actually stopping us. They didn’t want to be blamed for failure. Gingrich was quoted in one newspaper article telling Panetta that if the President took responsibility for the rescue plan, he would hear a “huge sigh of relief” from Congress. The legislators understood what needed to be done but didn’t want to have to vote for it. But even such halfhearted opposition was not without cost. Attempts to criticize the program without actually stopping it created market concern that the program was at risk, thus working against the objective of reestablishing confidence and perhaps putting more taxpayer funds at risk than would otherwise have been necessary.
Other attacks were truly meant to stop us and were getting quite ugly, especially a concerted effort at personally vilifying me. One rumor was that I had a secret account somewhere holding Mexican securities. The nastiest official statements came from a Republican freshman congressman from Texas named Steve Stockman, who accused me of various “suspicious” conflicts of interest and called for an investigation into whether I had arranged the rescue package for my own benefit. He said Goldman Sachs, which had underwritten the privatization of some of Mexico’s nationalized industries, now might face liability from investors who lost money there. When I had joined the administration in 1993, my equity in Goldman Sachs had been converted into debt, and I had gone far beyond the requirements of the Office of Government Ethics—and paid a significant amount of money—to neutralize my position so that I had neither benefit nor risk tied to the success or failure of the firm.
To me, the attacks were an illustration of how harsh and ugly the political process had become. Critics weren’t content to disagree with our policies; they impugned my motives and asserted hidden conflicts. At that point, I was still somewhat surprised that opponents would make ad hominem attacks as a way of dealing with policy disagreements. As time went on, I came to recognize that, to some extent at least, Washington unfortunately functions this way.
In February, the daily reports Dan Zelikow prepared on Mexico made for gloomier and gloomier reading. Alfonse D’Amato, by now a relentless critic of ours, said our approach had “all the potential of being a very real debacle.” Bob Dole, who had signed a statement favoring our use of the ESF, was also in the process of revising his position, albeit more quietly. In a word, the political situation looked grave.
Guillermo Ortiz spent much of early February in Washington. He was negotiating the details of the new IMF program with Stan Fischer and others at the Fund, and also negotiating with Larry and his team on our bilateral program, which required Mexico to follow the IMF program and had some additional elements. Meanwhile, Mexican markets were uneasy and deteriorating. Ortiz was spending days and nights talking to the IMF and to us about conditions and difficult policy measures, all the while wondering whether he could sell the agreements to a suffering public back home. He looked ashen and exhausted. As great as the stakes were for us, we could only imagine what the crisis felt like for him.
A few of our own officials with primary responsibility for the problem also showed the pressure in their faces. I remembered similar stressful reactions from traders at Goldman Sachs when losses mounted. At one point Jeff Shafer, who was conducting our negotiations along with Larry, looked so distressed that I told him what I had told traders many times in the past—that a thousand years from now none of this was going to matter much. I told Jeff that he was extraordinarily capable and doing his best in difficult circumstances—and that was all anyone could ever do. One way or another, we’d make our way through this.
One source of remaining uncertainty was
the new president of Mexico, Ernesto Zedillo. Zedillo was an economist, educated in both Mexico and the United States, with a doctorate from Yale. But I had not met this man to whom we were about to lend $20 billion, and no one in the administration knew him well. We didn’t have a sufficient sense of how committed Zedillo would be to following through with the difficult reforms that were going to be required for the program to work. And we needed to be sure that Ortiz was speaking for him in all cases in our negotiations. So in a phone conversation with Zedillo, I proposed sending Larry down to meet with him. Zedillo thought that was a good idea.
This trip involved dilemmas of substance and perception in both countries. At a substantive level, our economists had a series of proposals to reform aspects of Mexico’s economic policy and reestablish confidence. But the program would never work if we imposed these measures. We had to reach a meeting of the minds with Mexican officials, and they had to take ownership of the program. The problem of public perception was related but distinct. On the one hand, we didn’t want the Mexican public to feel we were infringing on their sovereignty. On the other hand, we wanted the American public to feel precisely that we were imposing strict economic conditions on Mexico to protect taxpayer money. The tension between these contradictory demands pervaded our discussions. We spent countless hours fine-tuning the wording of our public statements to avoid erring in one direction or the other.
We solved the perception problem around the trip with a cloak of secrecy. We put in a presidential order for an Air Force plane, and before dawn Larry and David Lipton were off on a mission. We made every effort to keep their trip quiet, and luckily no one saw them slipping in and out of Los Pinos, the President’s dwelling in Mexico City. More important, our substantive concerns were eased. Larry came back deeply impressed with Zedillo. The new president of Mexico understood exactly what he was doing. Moreover, Zedillo clearly had full confidence in Ortiz. We didn’t need to worry about his negotiator getting out ahead of him.
Furthermore, President Zedillo was firmly committed to economic reform despite the difficulties that lay ahead for his country. The single most important aspect of this reform was interest rates. The IMF had negotiated that the interest rate would be about 2 percent per month. However, inflation was expected to be 4 or 5 percent or higher. We wanted to restore confidence in the peso and knew that no one would hold pesos if their position lost value because the rate of return was negative in real terms—that is, if interest rates were lower than the rate of inflation. But the Mexican team negotiating in Washington had rejected higher interest rates. In the meeting with Zedillo, Larry raised this problem after forty-five minutes of polite conversation on the full range of issues regarding the rescue. Zedillo thought for only a moment, then said, “I spent my whole career at the Bank of Mexico writing articles saying that Mexico should have positive real interest rates. Now is not the time to abandon that idea.” Although some critics take issue with the need for high interest rates in a financial crisis, this approach was absolutely essential in Mexico for two related reasons. It created confidence that credible policies were now in place to restore stability and, in the context of that confidence, it offered investors an attractive rate of return to induce them to hold pesos.
On February 16, I hosted a dinner at the Jefferson, the pleasant old hotel on Sixteenth Street that served as my home in Washington for six and a half years. In a private dining room at the back of the restaurant, Panetta, Berger, and the rest of our group at Treasury convened for one last examination of the program about to begin. In a few days, I was expecting to sign an agreement that would commit us to lend $20 billion to Mexico. Though we retained the power to withdraw unilaterally at any point, this was our last real chance to change our minds.
In previous discussions, Larry had laid out the analysis—and the risks—very clearly. In theory, if Mexico offered a high enough interest rate, then people—whether ordinary Mexicans or foreign investors—would choose to hold pesos rather than buy dollars at a particular exchange rate. The greater the confidence that the government’s policies and IMF-led financial support would succeed in restoring financial stability, the lower the interest rate that would be needed to persuade investors to hold pesos. But if people feared that the program would not work—that their pesos might quickly lose their value as the exchange rate plunged further and inflation accelerated, putting more pressure on the peso and creating a vicious cycle—they would demand a terribly high interest rate to compensate for that risk. And as interest rates climbed, we might reach a point at which higher rates could actually become counterproductive in attracting capital. Rather than attracting capital and increasing the demand for pesos, higher rates could reduce the demand for pesos by threatening to push the government’s debt burden to a level where default seemed inevitable, or trigger a collapse in the already weak banking system. In that case, the plan would fail and our billions of dollars in loans from the ESF would merely have helped finance some of the capital flight as money poured out of Mexico. Larry, Alan, the rest of the team, and I had spent endless hours trying to gauge how high interest rates could go without being too high. But what if no interest rate existed that was high enough to attract capital before rising above the level that would scare capital away?
Interest rates were the most critical issue, but other policies were also crucial to reestablishing confidence and therefore growth. These included a commitment to a floating exchange rate to avoid a rerun of the previous crisis; a budget plan that showed that the government could tackle its debt burden; reform of the banking system, revealed by the crisis to be close to insolvent; and much greater transparency so that investors felt adequately informed. The more credible the government’s commitment to a strong reform program, the less pressure there would be on the exchange rate and the more leeway Mexico would have on interest rates.
As we sipped our coffee at the Jefferson, I went around the dinner table and asked all present what they thought the odds were that the plan would work. Dan Zelikow, who had seen real economic dysfunction as an adviser to the first democratically elected government in Albania, thought the odds of success were only one in three. Larry thought our chances were substantially better but didn’t offer precise numbers. David Lipton gave the most optimistic specific prediction: better than a 50 percent chance. What was striking was that everyone agreed we were taking a significant risk.
In a sense, the plan had two distinct, but intertwined, risks. The first was that the Mexican government would simply be unable to follow through on the tough steps needed to rebuild confidence and attract private capital again. The second was that official money—from the United States and the IMF—would not be sufficient to provide the breathing space needed while policy reforms took hold. Ironically, the bigger and more certain the promise of official money, the less was likely to be needed.
Making matters more complicated, our G-7 allies were still protesting Camdessus’s decision to add another $10 billion from the IMF. In response, Camdessus suggested restructuring our deal. On the morning of February 21, the day for signing our agreement with Mexico, Camdessus told me that the IMF could provide only $7.8 billion, plus contributions from elsewhere. That was inconsistent with his original commitment; now he wanted to go ahead with the extra $10 billion only if it came as bilateral loans from other countries, similar to our ESF commitment. That was a problem for us, since Mexico needed to have the entire $17.8 billion available and I had always told Congress that the total IMF contribution would be $17.8 billion. I sympathized with Camdessus’s difficult position. But for him to do this now would harm the program and seriously undermine our credibility in Congress.
Camdessus had provided strong leadership in difficult circumstances and I had great respect for him, but this wouldn’t work. With Leon sitting in my office, I called back and said, “Michel, this is not what we agreed to. And if you insist, I am going to go out and make a public statement. We are going to hold a press conference and anno
unce that you have changed the deal. And I’m not going to go ahead with the Mexican program.”
Michel said, “You can’t do that.”
I replied that, in fact, we could. The moment was dramatic, but in the end, Camdessus came around, and our strong relationship with him—so important in the years ahead—was not harmed. My approach in general is to try to see both sides and work to find common ground. But sometimes there is no good alternative to an adamant stand calmly taken.
We signed the Mexican rescue agreement as planned that day in the Cash Room at the Treasury Building. The Cash Room was where citizens once came to trade paper dollars for gold. The location seemed appropriate, since the closing of the gold window and the creation of the ESF in 1934 had made the action we were about to take possible. But we were all concerned. After the signing, I walked back to my office in worried silence with Sylvia Mathews and David Dreyer, another senior adviser. David tried to cut the tension with humor. “I guess we’ll never see that money again,” he joked. Sylvia and I didn’t smile. It’s funny to me now, but it wasn’t then.
A night or two after that, when the positive market reaction to the agreement had already dissipated and markets were once again dropping, Larry came into my office and offered to resign. It was about eleven in the evening, and we were both still at work. Larry felt personally responsible for an effort that might well fail. I told him that his talk about resigning was ridiculous. While I understood how Larry could feel his responsibility so keenly, I told him he wasn’t any more responsible than the rest of us and he was taking the matter much too personally. What we were doing was right, and we were all in it together. We’d just have to hang on and get through it, one way or the other.