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Mexican Government and Banks Cap Rates to Defuse Debt Crisis

By Juanita Darling
Los Angeles Times

Mexico put a cap on soaring interest rates Wednesday as part of an attempt to defuse a mounting debt crisis.

Interest rates on existing business loans will be limited to 25 percent and on credit card loans, 38.5 percent, under an agreement negotiated between the Finance Ministry and the Mexican Bankers Association. The cap affects only outstanding debt, not new loans.

Mortgages will peak at 6 percent if homeowners agree to renegotiate the principal owed under a complex system that integrates inflation rates into the value of the principal.

The bankers also agreed to halt foreclosures until Oct. 31, to absorb part of the administrative costs of restructuring loans, and to stop charging late-payment fees.

"We think this is an extremely important step in helping those who want to pay their debts," said a senior Finance Ministry official.

The bad-debt portfolio of Mexican banks has swollen to 15 percent of total outstanding loans as some interest rates have exceeded 100 percent. High interest rates are a result of the economic crisis provoked by the devaluation that has cut the peso's value more than 40 percent since December.

In response, farmers, small business owners and credit card holders have banded together in increasingly militant movements to demand debt relief, insisting that the government and banks share the burden.

The program announced Wednesday is expected to cost banks about 5 billion pesos - slightly less than $1 billion - and the government 7 billion pesos - slightly more than $1 billion.

The cost to banks will come out of their margins, the difference between the market rate they pay on savings accounts and the now-lower rates they will be charging on loans. The government will absorb some of that cost by loaning the banks money at lower interest rates than they would have to pay on savings accounts.

Finance Ministry officials said the program would cut interest payments in half for 75 percent of all bank debtors.

The announcement was greeted with skepticism by consumer and small business debtors as well as independent economists.