How the Peso Plug Was Pulled

by Patrick J. Buchanan – January 2, 1995

After one of his great reforms had miscarried, Britain’s Whig Prime Minister Lord Melbourne exploded: “Nothing that the wise men promised has happened, and everything the damn fools said would happen has come to pass!”

Well, it sure looks like the “damn fools” were right on the North American Free Trade Agreement.

Swearing it would never, never, break faith with investors, the newly installed regime of President Ernesto Zedillo, early Christmas week pulled the plug on the Mexican peso, stepped back and watched it plunge 30 percent against the dollar.

Result: Wipeout. Mutual funds of Mexican stocks plummeted. Wall Street brokers and bankers who had put clients’ money in peso notes lost 30 percent. U.S. investor losses in Mexico’s “Christmas crisis” are already estimated at more than $10 billion – more than five times the value of our entire trade surplus with Mexico in 1994.

This was predictable; and it was predicted. Repeatedly, NAFTA opponents warned that Mexican officials were dissembling about the value of the peso. “These guys are just playing poker with us, and they are going to have to devalue the peso,” Ross Perot told a House panel on March 24, 1993.

With soothing deceit Zedillo & Co. carried off a grand larceny. They lied about the fact that Mexico’s dollar reserves were almost gone. They lied about their plans to let the peso float.

Duplicity breeds distrust in a democracy. By making fools of those who put their faith in them, by vindicating speculators who bet they were lying, the Zedillo regime has forfeited the trust and confidence of the bankers and investors whose decisions may determine Mexico’s destiny.

Besides gullible and fleeced U.S. investors, the major victims:

Mexican workers, who saw their pay cut 30 percent, in terms of their ability to buy U.S. goods, and Mexican businesses who rely on American suppliers for parts, materiel and consumer products. Their prices will skyrocket.

U.S. exporters, too, will discover that the peso devaluation has wiped out any benefit from NAFTA’s reductions of Mexico’s 10 percent tariff on U.S. imports. Our ballyhooed trade surplus, a big talking point for NAFTA, is about to become yet another bleeding trade deficit.

Another loser, big-time, is the American taxpayer.

After NAFTA, Treasury Secretary Lloyd Bentsen set up a $6 billion fund for Mexico to sue to protect the peso. Now, Mexico has been authorized to spend the $6 billion – and Treasury is cobbling together an even bigger bailout.

Why? Because Mexico’s treasury is empty, and tens of billions of dollars in notes are coming due.

Stunned Wall Streeters are demanding to know what happened to the tens of billions from the sell-off of state enterprises during the celebrated reign of President Carlos Salinas. Excellent question.

Perhaps Mr. Salinas, this year’s winner of American Enterprise Institute’s prestigious Boyer Award – and Mr. Clinton’s choice to head the World Trade Organization – has an explanation. Let’s hear it.

This debacle is only beginning. Before it plays out, American taxpayers, writes Jim Sheehan of Competitive Enterprise Institute, may be held liable for much of Mexico’s enormous debt.

Look at the numbers: In 1995, some $58 billion in high-interest Mexican treasury bills come due – $10 billion by April 1. According to the rules under which these bills were issued, the buyer is allowed to convert to dollars, upon demand. Therein, said one financial writer, “lies the basis of concern by the international financial community.”

I’ll bet. And who do you think Zedillo & Co. will be coming to, to bail his one-party regime out of national bankruptcy?

Winners from the peso devaluation: Multinational corporations that moved factories out of the United States to Mexico. The pay of their workers will be cut by 30 percent, in dollars. Profits should improve smartly.

So, one year after NAFTA, the chickens come home to roost:

While slashing our own social safety net, U.S. taxpayers must support a foreign currency, fund a North American Development Bank to lend Mexico billions to clean up her environmental mess, and then finance a bailout of the Mexican economy. Any U.S. benefit from Mexico’s tariff reductions is erased. Our trade surplus is about to become a trade deficit.

With NAFTA, President Clinton and Congress made an incompetent, corrupt and now bankrupt regime a full partner of the United States. Now U.S. citizens are going to have to underwrite that partner’s gambling debts.

And, oh yeah, I almost forgot: I told you so.