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Financial Post, Weekly edition, Fri 03 Feb 95, page 7

G-7 summit to focus on Mexico's problems

Greg Ip

It may be a meeting of the world's richest countries, but this weekend's G-7 summit in Toronto will be devoted to the problems of one poor country - Mexico.

In addition to the normal survey of the state of the world economy, the finance ministers and central bank governors of Canada, the U.S., Germany, Japan, Italy, France and Britain who meet today and tomorrow, are expected to review Mexico's financial disaster and what can be done to contain further similiar crises.

Germany will likely want increased attention on Russia, and Japan may provide an update on the economic consequences of the Kobe earthquake. But U.S. Treasury Secretary Robert Rubin said Wednesday Mexico would dominate the weekend discussion.

G-7 summits in recent years have mostly produced platitudes about sound economic policy and little commitment to action. This year's may be no exception, even with the Mexican crisis.

''I hope the Mexican crisis has been more or less locked up - I don't know that there's much they [the G-7] can do at this stage except make sure it doesn't fall to pieces in some way,'' said John Williamson, senior fellow at the Washington-based Institute for International Economics.

''It would be harmful at this stage if they came in and said, 'Well, we have a package,' then implied it wasn't enough because they were going to put in a bit more.''

Earlier this week, U.S. President Bill Clinton used his executive powers to construct a financial rescue package for Mexico, whose economy has been battered by waves of capital flight after it devalued the peso in December.

The package includes US$20 billion in loans and loan guarantees from the U.S., US$17.8 billion from the International Monetary Fund and US$10 billion from the Swiss-based Bank for International Settlements.

The money is principally to help Mexico meet payments on maturing foreign currency-denominated debt and to prop up the peso.

Michel Camdessus, managing director of the International Monetary Fund, will attend the meeting and may raise the possibility of a permanent contingency fund of the type put together for Mexico.

Robert Solomon, guest scholar at the Brookings Institution in Washington, said while there is little the other G-7 countries can add to the U.S. measures, except what they have implicitly done through the IMF and BIS, they might consider Camdessus' idea.

''If I were Bob Rubin or [British Chancellor of the Exchequer] Kenneth Clarke or Finance Minister Paul Martin, in this discussion I'd say: 'Let's be realistic.' This happened in Mexico, it could happen in some of the other so-called emerging market economies that have large inflows of capital,'' said Solomon.

''Some of those countries have overvalued exchange rates. Sometimes those exchange rates have to come down, and if it's not done smoothly, as in the case of Mexico, you have a crisis.''

Martin, host of this year's summit, may get some moral support for his efforts to cut the federal budget deficit. Solomon said budget deficits remain a lingering blight on an otherwise cheerful economic landscape in the G-7.

''No doubt his fellow finance ministers will support [Martin] in the meeting and publicly,'' but that doesn't necessarily mean it would have any influence on Canadian politics, Solomon said.

	This information is provided by the Financial Post.
	Please send comments to: g8@utoronto.ca Revised: June 3, 1995

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