Unrest Sparks Mexican Stock Upheaval : Bolsa Index Suffers a Sharp Drop Before Rebounding at Close

Trading slips littered the floor of the Mexican stock market at the close Wednesday as investors--reacting to the peso’s sharp drop and lingering uncertainty in the southern state of Chiapas--drove the market index down as much as 10% in heavy trading before recovering most of its losses.

In a day of roller-coaster selling that clearly reflected the tense mood of Mexico as the army and police restored government control in Chiapas, the Bolsa’s main IPC index lost 232 points by noon--the steepest drop since the stock market crash of 1987--before recovering to post an overall loss of 3.1% at the end of trading.

The falloff in the Bolsa occurred despite a hike in interest rates by the central bank designed to cushion a new assault on the peso. Analysts said the market drop was fueled by investor fears that the currency would be devalued again by the new administration of President Ernesto Zedillo.

To counter those fears, a spokesman at Banco de Mexico ruled out any new modifications of the exchange rate policy. That helped pick the market off the floor in mid-day, analysts said.

Meanwhile, the peso slumped to the new limits of the intervention band against the dollar. That band fell by 53 centavos, or more than half a new peso, in Tuesday’s devaluation. The dollar was trading late Wednesday in New York at 3.9820 pesos compared to less than 3.5 before Tuesday’s surprise devaluation.

Traders described the foreign exchange market as crazy and horrible, and estimated some $2 billion to $3 billion in hard currency had fled the country.

Bolsa analysts worried about the level of Mexico’s foreign exchange reserves. Some estimated the reserves have fallen to about $11 billion from more than $17 billion when they were last announced by the government on Nov. 1.

Market sources said top central bank officials who held conference calls with worried investors outside Mexico told them the reserve levels continued to be in double digits, but they gave no more precise numbers.

“The market has to analyze the new exchange rate,” declared Manuel Robleda, president of the Bolsa de Valores. “I only hope it’s in an orderly fashion, not like today’s violent and exaggerated reaction.”

Especially hard-hit were Mexico’s blue-chip corporations, which are likely to show large fourth-quarter losses on foreign exchange transactions. Also undercut were many U.S. mutual funds with holdings in Mexican equities, whose value dropped by nearly 15%.

The impact of Mexico’s financial turmoil spread to other markets in Latin America, where analysts said there was panic selling by American fund managers. In heavy trading, Brazil’s market, for example, lost more than 6%; the Argentine stock index was off by 5.7%.

But many investors and market analysts expect the Bolsa to rally in coming days, as buyers search for bargains in a market that has been falling for several months amid rising tension in Chiapas.

Citing a “climate of uncertainty” nationwide, spawned by a renewed uprising on Monday by the Zapatista National Liberation Army and peasant supporters, Zedillo’s government billed its decision on the peso as a move to steady the Mexican investment market.

Bolsa analysts, however, said that Chiapas was not their only worry. One of the main concerns is how far they can trust the new Zedillo government after it stunned experts by abandoning a policy of exchange rate stability and launched Mexico’s first major devaluation in seven years.

“The initial response when you have such a major change in policy has to be very negative. People are caught off guard and are in a state of shock,” said Felix Boni, head of market research at Interacciones brokerage in Mexico.

* CHIAPAS CONFLICT

Civil disobedience marks new stage in conflict. A1

* U.S. MARKET REBOUNDS

Stocks rallied, with the Dow gaining 34 points. D3

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

A Year of Turmoil

Mexico and its stock market have been through a lot this year. The nation has undergone violent uprisings, political assassinations and a presidential election, all of which have been reflected in the Bolsa. Weekly closes of the Bolsa’s IPC index, except latest:

Jan. 10

The Bolsa falls 6.32% in the biggest drop of the year after more than 2,000 Indian soldiers captured four towns in the Mexican state of Chiapas on Jan. 1.

March 23

The ruling International Revolutionary Party’s presidential candidate, Luis Donaldo Colosio, is assassinated.

Aug. 21

Ernesto Zedillo is elected president.

Sept. 28

The secretary general of the Institutional Revolutionary Party, Jose Francisco Ruiz Massieu, is assassinated.

Dec. 1

Zedillo is sworn in as president.

Wednesday

The Bolsa falls 3.1% to 2,203.6 as nervous investors dump stocks in the wake of a renewed up rising in Chiapas and a falling peso.

Sources: TradeLine, wire reports. Researched by ADAM S. BAUMAN / Los Angeles Times