MEXICO’S FINANCIAL CRISIS : Back From the Brink : Mexican Economy Rebounds Strongly on News of Bailout

Mexico’s economy reached the edge of disaster Tuesday and then took a giant step back toward normalcy as stock markets and the peso rebounded dramatically on news of a $49.8-billion international loan package, fortified by $35 billion in new credits.

The sagging stock exchange index soared more than 10% for its biggest one-day gain in seven years, and the peso gained 55 centavos to close at 5.80 after traders learned that the new rescue package had been put in place, circumventing the U.S. Congress.

“Most of the losses of the past three weeks have been recovered in two hours,” said Damian Frazier, an analyst in the Barings Securities office here.

Just how quickly the situation changed--and how close Mexico came to collapse--was evident in Tuesday’s regularly scheduled government bond auction. Bids placed overnight for dollar-backed bonds, or tesobonos , had been at interest rates as high as 40%, a clear sign that investors feared the government was about to default.

But once the rescue package was unveiled here and in Washington, central bank officials--who last week had accepted interest rates averaging 26.99%--clearly considered the offers too high. They declared the auction void, rejecting all bids.

“Yesterday, people thought the world was coming to an end,” said Brian Barish, an analyst at Lazard Freres. “It was pretty clear that Mexico would have to default without the (aid) package. There has been a large change in the environment.”

The new aid package cobbled together by Clinton is a combination of credit lines from the U.S. government, the International Monetary Fund and the Bank for International Settlements. No approval is needed from Congress.

“This financial package clearly does what was needed to stabilize the financial markets,” Mexican Finance Minister Guillermo Ortiz said. “The package will permit the country to meet its short-term obligations and to transform this short-term debt into medium-term debt.”

To some, the package is finally a reminder--after weeks of sharp words by politicians on both sides of the border--of how closely linked the two economies have become.

“I am overwhelmed,” said Mexican economist Rogelio Ramirez de la O. “It feels like the city of New York or a state. The linkage between Mexico and the United States is much too strong,” he said, for the Clinton Administration to let Mexico collapse.

Earlier, as Congress had balked, the Mexican government had begun closing ranks in a way that threatened the foreign pension funds and other institutional investors that own tesobonos .

Instead of saving scarce foreign reserves to pay the mainly foreign holders of the bonds, the central bank had begun loaning money to Mexican banks and companies to help them make payments on their own dollar-denominated loans.

That meant that when the government’s foreign reserves went dry, tesobono holders would not have been able to cash out, putting them in the same boat as Mexican companies with dollar debt.

The aid package gives everyone--Mexican companies and Wall Street investors--the chance to survive the crisis by guaranteeing that dollars will be available.

Still, Tuesday’s recovery is barely a beginning, analysts said. The government economic plan is based on a peso valued at 4.5 to the dollar, not Tuesday’s 5.8, and a stock exchange index at Tuesday’s close of 2,093.98 would have been disappointing a month ago.

In fact, for one analyst who asked not to be named, the euphoria has already begun to fade.

“It’s amazing how fragile things were, that they could change that much,” he said. “I’m not sure whether to celebrate or not.”

* NEW APPROACH

The new Mexican aid plan announced by President Clinton and what it may mean. A1