Mexican Peso Plunges Past 800 Per Dollar in Near-Panic Selling
The meltdown in the value of Mexico’s currency continued unabated over the weekend as speculation about the country’s economic problems and galloping inflation fueled near-panic purchases of dollars.
In Mexico City, it took more than 800 pesos to buy a single U.S. dollar on the free market. Ten days ago, a dollar could be bought for 550 pesos. The overall decline in the period amounts to more than 45%.
Several exchange houses on Paseo de la Reforma, Mexico City’s principal downtown street, closed Saturday as they ran out of U.S. currency. In the border town of Nogales, merchants declined to accept pesos for retail purchases.
Declines in the peso’s value are not surprising; uncertainty about the path of the Mexican economy has long driven anyone with extra pesos to seek refuge in the dollar.
But the recent rapid fall in the peso’s value is virtually unprecedented and, in the view of foreign diplomats and bankers, perhaps excessively pessimistic.
“The peso shouldn’t be declining so fast,” one foreign economic observer said. “Clearly, the problem is in the mind.”
Bankers and diplomats list various possible causes for the peso’s fall. Among them is speculation that the Mexican government may stop payment on its foreign debt, bringing on even more uncertain economic times. During recent weeks, government sources have floated the possibility of delivering a shock treatment to Mexico’s economy that would include the conversion of pesos into a new unit of currency, already being popularly talked about as the “Azteca.”
In addition, many Mexicans believe that prices will surge dramatically in the second half of 1986. Furthermore, a sudden nervousness over social order developed here last week after disturbances during an evening celebration of a victory by Mexico’s national team in the World Cup soccer tournament.
“At this point, anything can set off a spree of buying dollars,” a U.S. banker here said.
Uncertainty over payment of the country’s $96-billion foreign debt grows daily as negotiators from Mexico and the International Monetary Fund fail to find common ground on designing a future course for the economy. Private bankers say they will not lend new money needed for growth without an IMF blessing on Mexico’s economic policy.
New loans are considered necessary to push Mexico’s economy out of the doldrums.
The current stalemate centers on government spending, with the IMF insisting on lower budget deficits than the Mexicans are willing to concede.
Last week, Finance Minister Jesus Silva Herzog warned that the government had “not ruled out” stopping payments on the debt. Mexico’s ability to make its payments, which amount to about $1 billion a month, has been crippled by oil prices that have fallen to as low as $10 a barrel this year from about $28 a barrel in 1985.
Silva Herzog’s comments were taken as a sign that Mexico was running out of dollars. Most estimates put foreign reserves at about $2 billion to $3.5 billion, a dangerously low level.
“If we run out, how will I get dollars to buy from abroad?” said Fernando Guero, an auto parts importer as he stood outside a Reforma exchange office. “I’m going to stock up now.”
Reports have circulated that Mexico will declare a moratorium of sorts on debt payments by paying bankers only in pesos to be kept in accounts in Mexico’s nationalized banking system.
There is serious question, however, whether Mexico’s creditors would accept payment in non-convertible pesos. They might instead declare Mexico in default and perhaps try to recoup losses by taking over the country’s assets abroad, everything from airplanes to oil.
In any case, bankers and economists say that a moratorium may not be a cure-all. The price of oil is expected to stay relatively low for the remainder of the year, and sources for new loans would surely dry up following a moratorium call. A drastic action might also make foreign suppliers of parts and equipment for Mexico’s industry wary of selling to the country.
“All the scenarios point to just muddling through,” a Mexican economist said.
Inflation is another variable that encourages the peso’s decline. The urge to use dollars as a hedge against inflation has intensified in recent weeks as the government announced price increases of basic consumer items such as tortillas and milk. Transportation price increases are expected next month.
Estimates for inflation this year range anywhere from 60% to 100%. In comparison, U.S. inflation is running around 3%, making the dollar’s value much more stable.
Disturbances that marked the celebration of Mexico’s opening victory in the World Cup soccer tourney under way here also created a wave of worry. A visiting stockbroker, in town to see some soccer games, said he is being deluged by inquiries about investments in the United States. One prospective client said he holds several thousand dollars in a safe at home and fears that mobs might rampage through his neighborhood and take it.
Some political content did accompany the incidents of vandalism and hooliganism that took place along Paseo de la Reforma last Tuesday.
A few youths chanted insults to Mexican President Miguel de la Madrid while others complained about the propriety of holding an expensive sports spectacle in the midst of national poverty and hardship.
At the May 31 opening of the World Cup tourney, De la Madrid was roundly booed when he appeared in the presidential box at Aztec Stadium.
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