THE DEBT SWAPPERS
Mexico's position looked hopeless. Ita talks with the IMF were breaking down. The Bank for International Settlements had just said that it couldn't help. The peso was plummetting -- in 10 days it had fallen by almost 50%. Even the Federal Reserve Board chairman had become sufficiently concerned to make an emergency dash to Mexico City to see the then finance minister, Jesus Silva Herzog. His mission: to head off an apparently imminent default by the Mexicans on their foreign debt.
Despite all this -- and Silva Herzog's departure a week after Volcker's mid-June visit -- the price of most Mexican debt on the secondary loan market was firm at around 60. There was no panic selling. A major reason for international bankers' confidence was that Mexico had finalized its long awaited plans for a capitalization programme to allow multinational corporations to swap foreign currency debt for peso equity capital, which they could use in Mexico. That meant Mexican debt -- which was for so long simply balance sheet ballast -- now had a use and a higher value.
Capitalization programmes are the height of financial fashion in the indebted third world.