Mexico Taps Overseas Credit to Bolster Peso : Crisis: But financial turmoil continues south of the border as the Bolsa plunges 6.65%, its steepest fall in five years.
The Bank of Mexico drew for the first time Monday on its $18-billion international line of credit, a move that bolstered the battered peso, but the country’s financial turmoil roared on with the worst one-day decline in the stock market in five years.
The central bank announced it had drawn $500 million from U.S. monetary authorities and $59 million from the Bank of Canada. A spokesman for the Federal Reserve Bank of New York, acting for the Federal Reserve System, confirmed that it was buying pesos in the foreign exchange markets on behalf of the Bank of Mexico.
While dispatching top emissaries to Tokyo, London and other foreign cities to explain the country’s rescue plan, the Mexican government decided to act on the currency exchange, one official said, “because the peso had reached ridiculous levels.”
Last week, the peso, which had traded at 3.4 to the dollar before the government triggered the crisis by allowing the currency to float Dec. 22, had reached a record low of 6. On Monday, the peso recovered to 5.05 before slipping back to close at 5.45.
However, the Mexican stock exchange index plunged 149.88 points Monday, or 6.65%, in its sharpest fall in five years. Traders said interest rates surging above 30% prompted investors to sell equities and buy fixed-income securities.
Stock market pessimism was also fueled as companies announced the devaluation’s effects on their bottom lines. Banking conglomerate GBM-Atlantico, for example, estimated that the financial turmoil will cost it $8.8 million in profit, mainly because of currency trading losses.
The attempt to improve the peso exchange rate may also have contributed to the market downturn, as investors skeptical about Mexico’s prospects for recovery seized on Monday’s stronger peso as the time to cut their losses and sell the currency.
“People were using this as an excuse to get out of pesos,” said Damian Frazier, an analyst in the Baring Securities office here.
In the short term, the central bank was trying to improve the peso exchange rate before the next round of dollar-denominated government bonds, called tesobonos, comes due today, Frazier said.
Breaking with a longstanding policy of announcing its foreign reserves only three times a year, Mexico’s central bank disclosed that reserves have dropped $602 million to $5.5 billion since Dec. 31, mainly because of payments of short-term obligations such as tesobonos.
Also Monday, the government detailed spending cutbacks as part of its pledge to reduce federal spending by 1.3% of gross domestic product. They include an end to car purchases and to such bureaucratic niceties as first-class plane tickets and press-clipping services and limits on cellular telephone bills and foreign travel.
Over the long run, the peso exchange rate must remain between 4.5 and 5 to the dollar if the government’s Emergency Economic Agreement is to work, Frazier said. A less-favorable exchange rate will mean inflation higher than the 16% annual rate projected for 1995 by the plan, causing workers to demand wage increases above the 7% in the agreement.
“While the peso is above 5, they are extremely vulnerable to a wage and price spiral,” Frazier said.
Abroad, Mexican officials continued their rounds of talks with international investors. Foreign Relations Minister Jose Angel Gurria met with government and business leaders in Tokyo while Francisco Gil, vice governor of the Bank of Mexico, spoke in London. Other Mexican government officials launched a U.S. road show in Los Angeles, Chicago and other cities to pitch their country’s stabilization plan.
International support appeared to hold firm. Japan’s foreign minister, Yohei Kono, reportedly pledged a $1-billion official loan package as Tokyo’s share of the bailout, while free-trade partner Canada was making available the first portion of its promised $1-billion credit line.
“We do not want a major destabilization occurring, because it puts all of North America in a poor light,” said Robert Fairholm, chief economic forecaster for DRI Canada in Toronto.
But the political peril facing Mexico’s leaders at home was brought into focus as opposition legislators presented the attorney general’s office with a formal complaint against former leaders they claim are responsible for the currency crisis. They include former President Carlos Salinas de Gortari and several of his top aides.
Times staff writers Craig Turner in Toronto and David Holley in Tokyo contributed to this report.