Mexican peso still in free fall

THE BALTIMORE SUN

MEXICO CITY -- Mexico's financial crisis deepened yesterday amid concern that the government would not be able to repay billions of dollars of debt without raising interest rates or printing more money.

The peso dropped an additional 10 percent to a record low against the dollar, and stocks and bonds tumbled. Overnight interest rates soared to 33 percent from 26 percent as hopes waned that the government would restore the confidence that investors lost last week when it abandoned a seven-year defense of the currency.

"The patient is lying on the table and hemorrhaging," said John Liegey, head of the Weston Group, a New York-based firm specializing in Latin American investment. "If they don't do something quick, there won't be a patient."

For the fourth straight day, government officials gave virtually no public indication of their plans. Spokesmen for President Ernesto Zedillo Ponce de Leon denied earlier reports that he would speak to the nation last night about the economy, appparently contributing to the confusion and concern.

"People this morning were hoping to see some demonstration of leadership from the Zedillo administration or from Zedillo himself, but it didn't come," said Marla Marron, a Latin American equities analyst at Salomon Bros. in New York.

The Mexican currency weakened yesterday to 5.70 pesos to the dollar from 5.15 Monday. That brought the decline in the peso since Dec. 20 -- the day the government devalued the peso and triggered the current crisis -- to 39 percent.

Meanwhile, the Bolsa stock market index dropped as much as 2.8 percent and the three U.S.-listed closed-end funds that specialize in investing in Mexico fell an average 14 percent. Mexican Brady bonds, which were created in 1990 when the country restructured its commercial bank debt, fell to their lowest level in almost four years.

Of most immediate concern to investors were $5.2 billion of tesobonos, or short-term dollar-denominated Mexican government bills maturing over the next six weeks. With investors leery of buying new Mexican debt and the country's hard currency reserves depleted from a fight to defend the peso last week, Mexico's government could be forced to pay sky-high interest rates or turn to the printing press to repay the bills.

Tesobonos became popular with foreign investors this year because they guaranteed that gains from the securities wouldn't be affected by fluctuations in the exchange rate. That's because the bonds are repaid in pesos based on the prevailing exchange rate. If the peso sinks against the dollar, the amount bondholders are paid increases by a comparable amount.

The Mexican government could be in a tight spot if foreign investors, who own 80 percent of the tesobonos, don't roll over their holdings. Since the government is short of foreign currency, it may have to print money to make the payments. That would cause inflation and interest rates to surge, further discouraging investors. It could also derail the steady progress the government has made in reducing inflation over the past six years.

"People want to get out of Mexico," said Richard Casey, Latin American economist at consulting firm IDEA. "When the tesobonos mature, people are going to want dollars."

A bad omen was contained in yesterday's auction of tesobonos. The government sold just $27.6 million worth of 91- and 182-day bonds and received no bids for the one-year securities. The central bank had been scheduled to sell $600 million worth of securities.

Worse yet, the bids for those securities were submitted Monday before the financial crisis deepened. Already the yield on the three-month securities -- which were sold at 10.49 percent in the auction -- were being quoted as high as 20 percent when they traded among investors later in the day, traders said.

Investors have been stunned by the speed with which the Mexican economic miracle unraveled as foreign investors who felt betrayed by the devaluation stampeded to unload their Mexican holdings.

"Credibility is like virginity -- it's impossible to get back once it's gone," said Steve Hanke, a professor of applied economics at the Johns Hopkins University who helped Lithuania and Argentina design mechanisms to stabilize their currencies by pegging them to the dollar.

The country many considered the benchmark and the most stable of all the emerging markets had seen the amount of foreign money invested in the Bolsa reach $55 billion at its highest point this year, up from $800 million in 1989.

U.S. Treasury Undersecretary Lawrence Summers sought to assuage the concerns among investors, saying the currency had fallen further than was justified. A weaker peso could also help Mexico reduce the trade deficit it runs with the United States by making its exports less expensive.

"We are in close contact with the Mexican and Canadian authorities regarding the situation in the currency markets," Mr. Summers said.

U.S. investors could be among the biggest losers in Mexico's financial crisis. Shares of widely held Telefonos de Mexico SA fell $2.875 yesterday, to $37.75, their lowest level since October 1991. It was the most active stock on the New York Stock Exchange yesterday, with more than 13 million shares changing hands. U.S. mutual funds that invest in Mexico also suffered.

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