MEXICO’S FINANCIAL UPHEAVAL : Peso Settles Amid Fear of Short-Term Damage : Fallout: One Wall Street firm downgrades the nation’s foreign debt. Mexican retailers already bemoan a drop in holiday sales.

The peso stabilized on international markets Friday, but the Mexican currency’s plunge this week led a top Wall Street firm to cut its rating of Mexico’s foreign debt and shattered efforts to forecast what will happen to the nation’s economy in the coming year.

Retailers and shoppers here also said the devaluation--which began Tuesday and drove the peso down nearly 30% against the U.S. dollar before rising slightly in Friday trading--cut into last-minute purchases heading into Mexico’s bleakest Christmas weekend in recent memory.

A sample of the reaction in international financial circles to the Mexican government’s sudden decision to stop defending the peso, just 24 hours after lifting the trading ceiling on the currency, came from Baring Securities Ltd. It issued a special report Friday titled, “The Mexican Crash.”

“Owing to the volatility of exchange and interest rates, it is unrealistic at this time to produce a plausible economic scenario for 1995,” the report declared, sharply criticizing the new government of Mexican President Ernesto Zedillo for the impact of the free-float.

Baring echoed many Mexican economists who believe that Zedillo’s initial move Monday to expand the peso’s trading band would have been a sufficiently painful move to adjust an overvalued currency and strengthen Mexico’s export economy.

“There is no doubt that the (government’s) economic management team has lost credibility through its handling of the crisis,” the Baring report stated, adding that confidence can be restored only through the announcement of a credible, new economic plan for the country.

Standard & Poor’s announced Friday that it was lowering to “Double B-plus” its rating on about $30 billion worth of Mexico’s long-term, foreign currency debt, and indicated the rating could fall still further.

But S&P; struck a more upbeat tone for Mexico’s long-range economic outlook, noting, “Public finances--the anchor of Mexico’s (economic) reform program--are fundamentally strong, with government debt under 25% of GDP (gross domestic product).”

Other financial analysts agreed. And J. P. Morgan went a step further, defending Zedillo’s financial advisers as “one of the best economic teams in the world.”

“What the government is attempting to accomplish through the devaluation and the accompanying macroeconomic measures is (to) adjust the economy to the new external reality” of international markets, Morgan concluded.

But its analysts, too, said the initial impact on the Mexican economy will be slow overall growth and that banks and other corporations with large dollar exposures “will be hurt, in many cases badly.”

“At the end of the day, however, when all the dust has settled and the recriminations have ceased, Mexico will have a much more competitive exchange rate . . . and a much more viable long-run development strategy than it had before.”

The Mexican peso stabilized against the dollar as panic about the country’s financial crisis ebbed. The peso was last quoted at 4.6750 pesos to the dollar, stronger than 4.80 pesos, where it was quoted late Thursday. At that level, the peso buys 21.05 cents, down 27% from 28.87 cents a week ago.

The Mexican Stock Market also stabilized after a roller-coaster week of heavy trading. The Bolsa index on Friday edged up 1.54%.