The currency swap did not solve the problem. So, in March of 1988, the players and referees agreed to introduce a new maneuver in the game: an accounting trick called a "debt swap." A debt swap is similar to a currency swap in that the United States exchanges something of real value in return for something that is worthless.
But, instead of currencies, they exchange government bonds. The transaction is complicated by the time-value of those bonds.
Currencies are valued by their
Mexico, using U.S. dollars, purchased $492 million worth of American Treasury Bonds that pay no interest but which will pay $3.67 billion when they mature in twenty years. (Technically, these are called zero-coupon bonds.) Then Mexico issued its own bonds with the U.S. securities tied to them as collateral. This meant that the future value of Mexico's bonds, previously considered worthless, were now guaranteed by the United States government. The banks eagerly swapped their old loans for these new Mexican bonds at a ratio of about 1.4 to 1. In other words, they accepted $100
million in bonds in return for canceling $140 million in old debt.
That reduced their interest income, but they were happy to do it, because they had swapped worthless loans for fully-guaranteed bonds.
1 Greider, pp. 485-6.
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THE CREATURE FROM JEKYLL ISLAND
This maneuver was hailed in the press as true monetary magic.
It would save the Mexican government more than $200 million in annual interest charges; it would restore cash flow to the banks; and—miracle of miracles—it would cost nothing to American taxpayers.1 The reasoning was that the Treasury bonds were sold at normal market rates. The Mexican government paid as much for them as anyone else. That part was true, but what the commentators failed to notice was where Mexico got the American dollars with which to buy the bonds. They came through the IMF in the form of "foreign-currency exchange reserves." In other words, they were subsidies from the industrialized nations, primarily the United States. So, the U.S. Treasury put up the lion's share of the money to buy its own bonds. It went a half-billion dollars
That is called bailout, and it
IMF BECOMES FINAL GUARANTOR
The following year, Secretary of State, James Baker (CFR), and Treasury Secretary, Nicholas Brady (CFR), flew to Mexico to work out a new debt agreement that would begin to phase in the IMF as final guarantor. The IMF gave Mexico a new loan of $3.5 billion (later increased to $7.5 billion), the World Bank gave another $1.5
billion, and the banks reduced their previous loan values by about a third. The private banks were quite willing to extend new loans and reschedule the old. Why not? Interest payments would now be guaranteed by the taxpayers of the United States and Japan.
That did not permanently solve the problem, either, because the Mexican economy was suffering from massive inflation caused by internal debt, which was in addition to the
1. "U.S. Bond Issue Will Aid Mexico in Paying Debts," by Tom Redburn, Los
2. "With Foreign IOUs Massaged, Interest Turns to Internal Debt,"
BUILDING THE NEW WORLD ORDER
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Notwithstanding this reality, Citicorp chairman, John S. Reed (CFR)/ whose bank is one of Mexico's largest lenders, said they were prepared to lend even more now. Why? Did it have anything to do with the fact that the Federal Reserve and the IMF would guarantee payments? Not so. "Because we believe the Mexican economy is doing well," he said.1
At the end of 1994, the game was still going, and the play was the same. On December 21, the Mexican government announced that it could no longer pay the fixed exchange rate between the peso and the dollar and that the peso would now have to float in the free market to find its true value. The next day it plummeted 39
