MEXICO’S FINANCIAL UPHEAVAL : Peso Falls Another 8%; Investors Bailing Out : Crisis: U.S. traders say the Mexican government is doing too little. Zedillo is to unveil a strategy plan Monday.

Concern over government inaction and the specter of renewed inflation wrought havoc on Mexico’s financial markets Tuesday as the peso lost another 8%, stocks and bonds tumbled and short-term interest rates skyrocketed.

Investors impatiently awaiting a government plan to control the chaos made for the exits. The plan, scheduled to be unveiled by President Ernesto Zedillo on Monday, is expected to include broad-based currency, wage and price controls and possibly a blueprint for selling government-owned assets to generate cash.

The peso closed Tuesday at about 5.55 pesos to the dollar, from 5.1 pesos Monday--a loss of 60% since the previous Monday. The Bolsa stock index closed down 65.89 points, or 2.8%, at 2,276.90, and overnight interest rates zoomed to 36%, up from Monday’s 26%. Rates for government securities rose to 30% from 23%.

The price of Mexican fixed-rate bonds posted their biggest one-day decline ever, falling 9% in value to their lowest level in almost four years, amid complaints from U.S. traders that the Mexican government was doing too little to resolve the crisis.

Economists, discouraged by the continued weakness of the peso since devaluation began last week, now predict a sharp increase in Mexican inflation in 1995 to as high as 20%, up from 7.5% this year. That’s because Mexican consumers will not be able to wean themselves from a dependence on foreign goods, which are now significantly more expensive.

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But some warned that the inflation rate could go higher if the government fails to enlist the support of labor unions and businesses in renewing the Pacto, the agreement by which the government over the past six years has gotten business and labor to accept proscribed limits on wage and price hikes.

“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 America. If Mexican officials “don’t do something quick, there won’t be a patient.”

But U.S. Treasury Undersecretary Lawrence Summers echoed the view of several analysts when he said the value of the peso had fallen further than justified by the state of the Mexican economy, adding that “excessive depreciation” is in no one’s interest.

“Recent movements in the value of the Mexican peso have gone considerably beyond what can be justified by Mexican economic fundamentals,” Summers said in a statement. “We are in close contact with the Mexican and Canadian authorities regarding the situation in the currency markets.”

But few held out hope that the currency will stabilize before Zedillo announces his plan, which could include lines of credit from the International Monetary Fund and the Federal Reserve Bank.

The peso’s problems continue to affect other Latin American stock markets. The Sao Paulo stock index, the Bovespa, slumped 1,646 points, or 3.8%, to 41,137. In Argentina, the Merval index sank 4% to 437.62 and Chile’s IPSA index dropped 2.3% to 142.29.

“The peso is out of control for three reasons: The Mexican government misjudged foreign investor reaction to devaluation. The government betrayed people’s trust after saying earlier in the month that they wouldn’t devalue. And third, they have been silent ever since,” said Geoffrey Dennis, an equity analyst with Bear Stearns & Co.

The peso began its free fall last week after the government announced it would let its value float against the dollar. The government changed its anti-devaluation stance after a severe depletion of its foreign reserves, which it used to buy up pesos on the open market.

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Observers such as Salomon Bros. economist Larry Goodman expressed doubt that Mexico will see a recurrence of inflation such as that triggered by the 1982 devaluation. The seven-year financial crisis that followed saw triple-digit inflation, massive capital flight to safe havens in Zurich and Miami, government seizure of banks and foreign investors’ loss of confidence.

As unstable as Mexico may now appear, Brookings Institution economist Nora Lustig said, the country is on much more solid footing. In 1982, Mexico ran a 16% budget deficit, forcing it to print money to pay its foreign and domestic debts. Now, after years of austerity, the government takes in more revenue in taxes than it spends, Lustig said.

“Still, we are very worried, and the government has to come out with a coherent and transparent exchange rate policy,” Goodman said. “There is going to be a time of uncertainty and volatility.”

Finance Minister Jaime Serra Puche said that to control short-term inflation, the government is relying on a 60-day wage and price freeze with key businesses and labor unions, beginning the day the government floated the peso last week.

Serra Puche and Mexican Central Bank economists indicated they will use that two-month moratorium to formulate new economic measures for the remainder of 1995 that will address long-term inflation. Zedillo’s speech Monday will give at least a preliminary view of the measures.

Meanwhile, Mexican economic analysts and independent columnists have strongly urged all businesses in the country to resist the temptation to hike prices immediately. For example, a front-page editorial Monday in Mexico’s prominent economic daily El Financiero appealed for employers and employees to treat the 60-day freeze as nothing less than a cease-fire on a battleground.

“These 60 days set aside for the authorities to adjust and design a new strategy must be understood as a necessary truce to evaluate the real state of the economy,” the editorial said. “For this reason, it is indispensable that during this break, society and especially the production sectors make additional sacrifices to combat speculation, avoid price increases and resist pressure on salaries.”

Observers said the government assets that may be sold to raise cash could include the state-owned toll roads, airports and secondary petrochemical plants.

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Kraul reported from San Diego and Fineman from Mexico City. Times wire services were also used in compiling this report.

Troubled Economy

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