Peso Rebounds Slightly on U.S. Credit Increase : Mexico: Clinton also asks the IMF to quickly put in place a substantial lending program. Stock market index rises 2.82%.

A bolstered pledge of support from President Clinton and central bank efforts to cap soaring interest rates provided a respite Wednesday from Mexico’s economic crisis.

Speaking directly on the Mexican dilemma for the first time after a telephone call from Mexican President Ernesto Zedillo, Clinton offered to increase and extend the United States’ promised $9-billion U.S. credit line to support the beleaguered peso.

“We have a strong interest in prosperity and stability in Mexico,” Clinton said in a written statement. “It is in America’s economic and strategic interest that Mexico succeed.”

In addition, Clinton asked the International Monetary Fund “to work quickly to put in place a substantial lending program” to support emergency wage and price restraints announced by Mexico to confront the crisis. IMF officials were in Mexico City negotiating a $2.5-billion line of credit.

Separately, a flurry of late afternoon meetings in Washington focused on still greater American aid. Several senators met at the Capitol with Federal Reserve Bank Chairman Alan Greenspan and Treasury Undersecretary Lawrence Summers to discuss a range of U.S. actions to deal with the growing Mexican crisis.

“It was a broad assessment of events in Mexico and their implication for banks here and financial markets across the world,” said Sen. Richard Lugar (R-Ind.).

A much larger credit line for Mexico could require congressional approval.

After Clinton’s comments circulated, the Mexican Stock Market Index, which had been down steeply at mid-morning, rebounded from two days of losses. The index rose above the 2,000 mark to close at 2,027.87, a gain of 55.54 points, or 2.82%.

The peso gained strength modestly, to 5.65 per dollar from 5.75 at Tuesday’s close.

Other Latin American stock markets, which have been tumbling in tandem with Mexico’s in recent days, also rebounded. But worries about the ripple effect continued. In New York, Argentina’s finance minister, Domingo Cavallo, said his country is experiencing a drain of capital.

“If, for a long period of time, there were capital flight, it would affect the availability of credit for Argentina’s private companies,” Cavallo said.

And in Mexico, a central bank official confirmed to Reuters that Mexico’s bank insurance fund has already intervened to help some banks unable to pay off maturing certificates of deposits in dollars held by foreign investors.

The unidentified central bank official described the problems as transitory, however, and said the support was geared toward tiding banks over any short-term cash crunch.

Earlier Wednesday, Zedillo told a meeting of civil engineers that the $18-billion international line of credit available to support the economy may be increased in the next few days.

“The economic program and financial package will soon make obvious the country’s solvency and restore the necessary domestic and foreign confidence in the financial markets,” Zedillo said, mentioning Clinton’s promise of support.

As Zedillo’s statements were made public, the Bank of Mexico attempted to halt the interest rate rise by limiting the yields that the central bank will pay to repurchase government debt. Limits ranged from 50% on overnight instruments to 29.12% for 12-month securities.

“We are trying to lead,” said one central bank official. “That does not mean that anyone will follow.”

Enrique Rubio, a trader for the Prime Brokerage, said the central bank effort helped. “In fact, money market rates got as cheap as 38%.”

However, Jose Borobio of Value Brokerage cautioned that even though the Bank of Mexico’s position helped keep interest rates from rising as much as expected on Wednesday, much of the market’s recovery represented bargain-hunting after the heavy selling of the previous two days that drove down prices.

Another outpouring of foreign capital is feared today when $684 million in dollar-backed government bonds, called tesobonos , mature. The government has told investors that in an effort to keep money in the country, tesobono holders will be offered alternative instruments backed by U.S. government bonds. However, no plan has yet been announced.

Mexico’s economic collapse has created some political fallout for the Clinton Administration, which spearheaded a narrow 1993 victory over a reluctant Congress to ratify the controversial North American Free Trade Agreement, linking the United States and Canada to Mexico more closely than ever before.

NAFTA was hailed as the beginning of a free trade zone for the Americas that most major economies in the region were clamoring to join. Instead, recent events have provided ammunition for NAFTA opponents who say the devalued peso will cost U.S. jobs by raising the price of goods sent to Mexico.