David E. Sanger and Anthony DePalma

This selection was originally published in the New York Times on 24 January 1995. David Sanger and Anthony DePalma are staff reporters for the Times.

While the Clinton administration and the Mexican government were saying until late last year [1994] that Mexico was a booming example of an emerging market that would bring wealth to workers in both countries, warnings were running rampant in both capitals that severe economic trouble lay ahead.

According to officials in Washington, the Treasury Department told several Mexican officials beginning last summer [1994] that the country's short-term borrowings had reached a dangerously high level and that the peso was being kept artificially high. But on several occasions, officials said, the Mexicans responded that they were aware of the problem but that nothing could be done during and just after the election that brought Ernesto Zedillo Ponce de Le¢n to power.

In Mexico City, officials now acknowledge that they knew the economy was in serious trouble months before Mr. Zedillo's election on 21 August [1994]. But they say that for political reasons, partly related to the elections and partly to the ambitions of President Carlos Salinas de Gortari to head the new World Trade Organization after leaving office, they chose to continue borrowing and spending at a tremendous pace, sustaining the illusion of a thriving economy.

Today, Guillermo Ortiz, the Mexican finance minister, said at a hostile meeting of the legislature in Mexico City that there was "a yellow light" in Mexico's balance sheets that anyone should have seen. He said that while the government was to blame, so was Wall Street, which "endorsed the economic policies and in particular the exchange rate policy of the Mexican Government."

The series of warnings issued from Washington, however, raises a number of questions about what the administration was saying in public about the health of the Mexican economy, signals that were picked up by both American companies and investors. In November [1994], as disaster loomed, President Clinton used the Summit of the Americas in Miami, the first meeting of Latin American leaders in nearly three decades, to celebrate Mexico's economic management as a model for the region's growth. He and his deputies issued no warnings that Mexico was consuming too much too fast or letting its debt grow too rapidly.

Asked today why Mr. Clinton offered no public words of caution, Michael D. McCurry, the White House press secretary, said, "The President's public comments have always stressed the fundamental strength of the Mexican economy and the commitment of the Mexican leadership to economic and political reform."

But a senior White House official added: "There was a great deal of sensitivity, as the Zedillo administration came to office, about not undercutting the very delicate situation they faced as they tried to form a government, so there was a very conscious effort not to be too heavy-handed. All these sovereignty issues are very sensitive."

Mr. Zedillo, an economist, contributed to the atmosphere of unbridled optimism. Visiting Washington on 23 November [1994], just before his inauguration, he talked of economic growth this year [1995] "at 4 percent or better, and soon 5 percent, which we need to generate a million new jobs a year."

Now he will be lucky if his economy posts any growth this year and if the number of jobs do not shrink. At the same time, the Clinton administration is now warning that unless the crisis is resolved, nearly half a million Mexicans seeking higher wages will illegally enter Texas and California during the next year.

In the aftermath of the Mexican debacle, officials in both Washington and Mexico are spinning tales of who knew what and when. The Central Intelligence Agency, for example, circulated a brief warning in July [1994] that Mexico's foreign currency reserves were being depleted in an effort to keep up the value of the peso. Now it is recirculating the same report, citing it as evidence that top government officials had been warned.

But several leading economic officials say that the original warning was buried in a mountain of economic intelligence issued by the CIA. "There was no headline, and they know how to get your attention when they want to," one official said.

The agency, officials say, provided no warning in December [1994] that Mr. Zedillo was considering a major devaluation of the peso, which precipitated the crisis. Washington was given a half-hour notice of the action.

Other Clinton administration officials said they warned Mexican leaders last year [1994] that the peso was overvalued, especially considering the tremendous pace at which Mexico was printing money.

One senior American official said that while it would be "inappropriate" to discuss private consultations between the Mexican and American governments, "it would also be a big mistake to suppose that we were unaware of the building problem." Mexican officials, he said, acknowledged the problem but did little.

Today, both administration officials and the House Speaker, Newt Gingrich, expressed optimism that Congress would approve $40 billion in loan guarantees=messentially cosigning a loan=min hopes of increasing the confidence of investors in buying Mexican securities again. "It's going to happen," Mr. Gingrich told reporters. Those comments helped reverse slides both on the Mexican stock exchange and on Wall Street.

Mexican officials now acknowledge that they issued far too many short-term bonds--called tesobonos--and they say Mr. Salinas's administration passed up several opportunities to devalue the peso slowly, a step that could have averted the huge sell-off in Mexican bonds and other securities.

Mr. Ortiz, the finance minister, said that in September [1994] he argued that the peso should be devalued in an orderly way when a pact with labor and business was renewed. He not only lost that argument but also was originally passed over when Mr. Zedillo picked Jaime Serra Puche as his first finance minister.

Mr. Serra Puche was forced to resign a week after the peso was devalued, and Mr. Ortiz took his place.

Other officials who were carried over from the previous administration say that when Mr. Zedillo took office on 1 December [1994] he knew how seriously overextended the Mexican economy was and that a crash could follow. But he also knew that the economy was addicted to the flood of international capital to keep paying its bills. So they said there was not much he could do except act as if nothing was wrong and encourage investors to keep pouring money into Mexico.