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Is a Mexican Standoff Inevitable?
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10869 |
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CURRENT ISSUES
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7 / 1986 |
3,847 Words |
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M. Delal Baer
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Four years into the debt crisis, a solution to Mexico's financial woes appears as distant as when the crisis first emerged.
During the early phases of the crisis, it was assumed that the problem was one of temporary liquidity and that budgetary adjustments would correct the situation. The search for a solution was characterized by cooperation and consensus on the part of debtors, multilateral financial institutions, and commercial banks.
The solution models adopted four years ago now seem frayed and inadequate. Latin American nations appear no closer to being able to meet their debt obligations, and in the case of Mexico, precipitous declines in oil prices have made the prospects for repayment bleak.
Indeed, payments on principal are hardly contemplated as Mexico borrows and struggles to meet interest payments alone. It is now clear that the strategies heretofore pursued have done little more than manage the problem and postpone the ultimate day of reckoning.
At this critical juncture, when creative strategies that address the root causes of the crisis are desperately needed, a dangerous lack of consensus between debtors and creditors is emerging.
On the one hand, Latin American leaders, economically and politically strapped by four years of austerity, are searching for relief. The ease with which political capital can be made out of defying the commercial creditors increasingly presents struggling leaders with a tempting path to popularity.
On the other hand, creditors are increasingly reluctant to invest more resources without rigorous assurances of repayment. As debtors and creditors move into the second phase of the debt crisis, the lack of consensus as to how to proceed could lead to a dangerous standoff. The longer this standoff continues, the more political and social pressures accumulating in the Latin American environment will complicate the search for a final resolution.
The Prisoner's Dilemma
Mexico and its creditors are currently locked in a position known to professional strategists as "the prisoner's dilemma."
The dilemma refers to a hypothetical situation in which two partners in crime are captured by authorities and placed in separate rooms for interrogation. Each prisoner is separately offered a reduced sentence in exchange for incriminating his partner. Such an individualistic, unilateral strategy offers limited gains and entails real costs.
If, however, both prisoners adopt a cooperative strategy and remain silent, then the chances for successful prosecution of either are greatly reduced; both prisoners win. This latter strategy, adopted under conditions of great uncertainty, clearly requires great trust and confidence between the prisoners. The temptation to pursue a unilateral strategy that guarantees at least a modicum of self-interest is great, even though such a strategy ultimately hurts all involved.
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