                             THE VIRGINIAN-PILOT 
              Copyright (c) 1995, Landmark Communications, Inc.

DATE: Sunday, January 22, 1995               TAG: 9501200031
SECTION: COMMENTARY               PAGE: J4   EDITION: FINAL 
TYPE: Editorial 
                                             LENGTH: Medium:   94 lines

PROP THE PESO? ONLY ON CONDITION MEXICO'S MESS

Not for the first time, the U.S. government is about to tread where other investors have fled: Mexico.

Political turmoil, financial bungling by Mexican authorities and the rise in U.S. interest rates have driven the peso to a crisis low. President Zedillo has asked for help, and President Clinton has responded with a proposal of up to $40 billion in U.S. loan guarantees.

The alternative, Mr. Clinton says, is dire: 30 percent (430,000) more Mexicans than already anticipated entering the United States illegally and a major drop in U.S. exports to Mexico and a concomitant loss of 700,000 U.S. jobs. Politically, it means loud and unpleasant I-told-you-sos from last year's opponents of the North American Free Trade Association. NAFTA was pred-i-cat-ed on bootstrap theory, not bailout.

As the extent of the damage to Mexico's economy and Mexicans' responsibility for it have unfolded, the support Mr. Clinton's proposal first received from Congress has eroded.

Policies Republicans don't like - overregulation of industry and labor, state-owned monopolies, disincentives to save - contributed to Mexico's mess. They ask, why spare the Mexican government some lesson-teaching consequences?

Democrats balk at bailing out speculative investors chasing high interest to the last dollar of Mexico's foreign reserves. ``This deal should be called `The Speculators' Relief Act of 1995,'' said an economist who opposed NAFTA. ``We should let the peso float, let the speculators take their losses and beef up the border patrol.''

Meantime, observers like George Steinbrenner, the Yankees owner and homily-deliverer who addressed the Norfolk Forum Tuesday night, wonder aloud: If the U.S. has $40 billion extra, why doesn't it go for schools at home instead of bailouts abroad.

If the loan guarantee is enacted as proposed, the United States will just have co-signed Mexico's notes to lure investors to Mexico's new, longer-term and higher interest bonds. If it works, the United States will pay out nothing and take in some $10 million in loan fees. With Chrysler, it worked.

With Mexico, doubters are right to suggest certain conditions. In an effort to allay fears of political instability among domestic and foreign investors, Zedillo has agreed to election reforms nationwide and new elections in Mexico's most unstable states. Down the road must come economic reforms that would keep Mexican capital in Mexico, encourage Mexicans to save and speed privatization of state-owned industries. More immediately, Washington should insist that revenues from Mexico's state-owned, $7-billion-a-year petroleum industry, Pemex, be used to pay off investors before the first U.S. taxpayer gets tapped.

Not for the first time, the U.S. government is about to tread where other investors have fled: Mexico.

As the extent of the damage to Mexico's economy and Mexicans' responsibility for it have unfolded, the support Mr. Clinton's proposal first received from Congress has eroded.