Mexico Moves to Prop Up Falling Market : Fund Established to Buy Unsold Stocks

The Mexican government and brokerage houses took steps Tuesday to stabilize the Mexico City Stock Exchange, where prices have fallen more steeply since Black Monday last month than on any other exchange in the world.

Spokesmen for some of the houses involved said the brokerages had created a fund of about $500 million in order to support stock prices in the months ahead by buying stocks for which there are currently no buyers. They said that the money was available as of Tuesday and that there was more to come.

Under the plan, the Banco Nacional Financiera, a government bank, is also committed to making a contribution to the fund, the spokesmen said, but the amount has not been determined. Some news accounts have suggested that the government might match the brokerage houses’ contribution to the fund.

The intervention by the brokerage houses and the government appeared to buoy the market. An index of 52 stocks traded on the exchange closed with a gain of 4.6% Monday and again rose slightly Tuesday, up 1.75% over Monday’s closing.

For the first nine months of this year, the Mexico City exchange was the fastest rising bull market in the world. The value of stocks on the exchange reached $6 billion at the beginning of October, but has fallen to $2 billion since Oct. 19, Black Monday.

Even given the traditional volatility of the Mexico exchange, or Bolsa as it is called here, the decline has been extraordinary. It is common these days in seismically sensitive Mexico City to call the crash an earthquake.

Tuesday’s effort to stop the slide has led to charges that a “black hand” is manipulating the market for the benefit of a few, while the so-called greenhorns--small investors who bought stock near the end of the bull market--are left with big losses.

“There has always been collusion in the Bolsa,” financial columnist Patricia Nelson said. “This time a lot of people got hurt.”

Prices on Mexico’s market had multiplied by a factor of seven from January into October, despite the lackluster performance of the Mexican economy as a whole. Many reasons were given for the boom: Shares in Mexican companies, valued at well below their worth, could be bought cheaply; the relatively few shares traded in the Bolsa meant that excess demand drove prices up rapidly; Mexicans with dollars in the United States had begun to bring their money home in search of quick profits.

Skyrocketing prices even created a political problem for the government. Stories of instant gain on Uruguay Street, where the exchange is situated, were in uncomfortable contrast with five years of steady decline in workers’ wages. On Oct. 5, the government took the unusual step of halting stock trading in the midst of a sharp bull market because it was “disorderly,” according to an official spokesman.

Government officials told the newspaper El Universal on Monday that the plan that went into effect Tuesday does not imply any “orchestration.” The fund permits brokerage houses and the government to inject money into the Bolsa when necessary to restrain a sharp drop in prices, the officials said.

“This is a way of ensuring that there is no further panic selling,” said Pablo Legoreta, a broker with Operadora de Bolsa, one of the country’s biggest brokerage firms.

Many observers believe that rather than stability, it is undue gain that the market manipulators are after. The magazine Proso charged that a recent government injection of cash into the Bolsa had created an artificial increase of 11% in the Mexican stock index over a three-day period. Those in the know made a lot of money, the magazine contended.

The government, at the same time, boasted that the increase, rather than the result of intervention, was a show of “confidence that investors have in the economic policy” of Mexican President Miguel de la Madrid.

According to broker Legoreta, brokerage houses tried to stem a fall in the market that occurred the week before the crash by putting in their own funds. Their move failed when markets in New York and London plummeted on Black Monday.

Some observers questioned whether any effort to put a floor on selling in the Bolsa can succeed so long as markets elsewhere are reeling.

“The epicenter of the Mexico crash was in Europe and New York,” said Sidney Wise, who publishes an investment newsletter here. “What happens here will depend on what goes on elsewhere.”

With all the manipulation going on in the Bolsa, it is difficult to analyze the collapse. One commonly voiced fear is that the crashes here and abroad foretell a worldwide recession that will mean tougher times for Mexico. A wide economic downturn abroad, especially in the United States, could endanger two dynamic segments of the Mexican economy--tourism and exports of goods other than petroleum. A decline in either would deepen the recession that has been plaguing Mexico for most of the past five years.

“Developing countries like Mexico could find it harder to earn foreign exchange,” said economist Rogelio Ramirez de la O. “It could create a tremendous problem.”

Among other things, reduced earnings from abroad would make it difficult for Mexico to continue making payments on its enormous foreign debt.

Locally, the Bolsa downturn creates a problem for Mexicans with cash on their hands and nowhere to put it. Normally, such a calamity would send funds streaming into bank accounts in the United States. But because U.S. interest rates are falling, as is the value of the dollar in relation to other currencies around the globe, dollar deposits are not necessarily a good investment.

On the other hand, leaving the money in Mexico makes less and less financial sense. The government has been propping up the peso so that, even while declining in value, it is worth more in foreign currencies than it should be, given Mexico’s poor economic health. In addition, runaway inflation here is eroding the value of the peso daily. Thus, for the moment, it makes sense to trade Mexican pesos for foreign currencies.

Until Oct. 19, the Bolsa was a perfect magnet for money held abroad by Mexicans. It was a repository for savings that offered outlandish returns far in excess of inflation. But those days appear to be over, at least for a long time.