CONFIDENTIAL
xii
programme. This may unlock some new money from the banks and a further Paris Club rescheduling (although this may well be held up by the failure of the Argentines to
complete their bilaterals on the earlier Club agreements). It is difficult to see how a package could be concluded without a disproportionate contribution from official creditors. ECGD met Argentine representatives in the margins of October's Paris Club and it was agreed that the 1985 bilateral could be signed. A timetable for signing the 1987 bilateral was not agreed but the interest rate was set at
LIBOR+0.5%. Many governments report arrears on the 1985 agreement, but Germany, France and Switzerland have signed their 1987 agreements.
35
The third serious army mutiny in two years occurred in the first week of
December. It is still not clear under what terms the rebels laid down their arms.
Mexico
36 The Economic Solidarity Pact (in place since December 1987) continues to squeeze
both growth and inflation. Real GDP is expected to rise by only 0.8% in 1988.
Annual inflation has fallen from its peak of about 180% in February to 81% in
October: monthly increases have been less than 1% for the past 3 months. The Pact
has been extended to end in December and has been supplemented by further spending cuts of 0.7% of GDP and an acceleration in the privatisation programme. Despite the fiscal restraint and the reduction of inflation, interest rates remain high and
have changed little since July. From 1 January the pact will be replaced by the Pact for Economic Growth and Stability. The main features of the new pact will be a daily depreciation of the peso against the dollar, by one peso per day until the
end of July, an 8% increase in the minimum wage from 1 January and increases in some public sector prices and tariffs (not petrol, bottled gas and electricity). With
the real exchange rate likely to continue to appreciate under the new plan, interest rates will need to stay high to compensate for subsequent anticipated depreciation
leading to a greater risk of renewed capital flight.
37 Despite the squeeze on the domestic economy, there was a trade surplus of only
$2.5bn in the period January-August (cf $6bn for the same period of 1987) reflecting
lower oil prices, import liberalisation and a sharp appreciation of the real
exchange rate. International reserves have also come under increasing pressure as
residents' outflows have accelerated, and had fallen to under $10 bn in October from
their May peak of some $17 bn. The prospect of current account deficits aggravated
by a further fall in oil prices and higher international interest rates led to a US
Treasury/Fed announcement in October that they were prepared to extent an apparently
unconditional $3.5 bn bridge loan.