Foreign Relations of the United States, 1969–1976, Volume E–11, Part 1, Documents on Mexico; Central America; and the Caribbean, 1973–1976

98. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Scowcroft)¹

Washington, August 20, 1976.

SUBJECT

• Economic Crisis in Mexico

The Mexican economy is on the brink of a major crisis. Mexico’s debt is roughly $22 billion as compared to $6 billion five years ago. This year alone it must repay roughly $5 billion in foreign debt, primarily to U.S. and European banks. Under current circumstances, it is unlikely to be able to do so. It is losing foreign exchange reserves at the rate of roughly $150 million per week, and will likely run out of reserves within two and one-half weeks. Unable to repay its debts, Mexico will have two types of options:

1) Declare a debt moratorium, which would cause enormous problems to the foreign banks which are its creditors. And this would, by association, make it extremely difficult for Brazil to continue borrowing on international capital markets;

2) Undertake a dramatic peso devaluation (roughly 40–50%), with the attendant increase in domestic prices, along with a stringent domestic reform program to reduce government expenditures and to attract back some of the foreign capital which has recently fled the country (roughly $2.5 billion outflow last year) and which will be needed to enable Mexico to repay its debt.

Having to resort to either option will be seen as a major disgrace for Echeverria—an admission of egregious economic mismanagement. Given the erratic character of the man, he may react to this situation by taking a very strong antiforeign attitude, by choosing option 1; this would certainly result in enormous criticism abroad and cut off the Mexicans from further credits. He may thus couple this with closer movement toward OPEC (a potential source of new funds) and perhaps movement toward some of the more radical countries in the Caribbean. Alternatively, if he is forced to undertake the difficult domestic reforms of option 2, he may try to blame them on Lopez Portillo, who has been intimately involved in the Mexican economy for some time and whom (it is rumored) Echeverria is now trying to prevent from coming to power. Echeverria has vowed that he will not allow a devaluation during his term; if he is forced to undertake one he may try to turn it instead to a disgrace for Lopez Portillo, claiming it was Lopez’s economic mismanagement which brought this on. Bill Hyland, whom I have briefed, is asking Bush to focus on the problem and its implications.

Ed Yeo and I are coordinating our analysis of this problem. He is in the process of preparing a paper for the President (and HAK) describing the problem more extensively, but I wanted you to have this information as soon as possible. As of now, no one outside Simon and Yeo in the Treasury Department, Bill Hyland and I know of the extent of the problem. We will continue to hold it extremely closely. Any mention of it would cause a complete erosion of Mexican reserves practically overnight. It would be wise, therefore, to discuss this with no one other than the President.

1. Summary: Hormats informed Scowcroft that Mexico’s massive external debt had brought the country to the brink of a major financial crisis.

   Source: Ford Library, National Security Adviser, Outside the System Chronological Files, Box 5, 8/3/76–8/30/76. Top Secret; Exclusively Eyes Only. Sent for information.