Mexican Stock Market Slides as Reality Sets In : Reaction: Bonds are snapped up at auction, but doubts linger about the government’s ability to pull the nation out of crisis.

The headlines proclaimed “Long Live Clinton!” and “Clinton to the Rescue!” but sobriety prevailed in Mexico’s financial markets Wednesday as stocks tumbled, wiping out nearly half of the rally that had greeted Tuesday’s news of a $49.8-billion global aid package.

While the peso rose for a second straight day and interest rates fell, the market’s nose-dive was blamed on a morning-after assessment that the nation and beleaguered President Ernesto Zedillo--who managed his first genuine smile in public after weeks of crisis--remain deeply mired in crises both political and economic.

Still, investors cast a limited vote of confidence in Mexico’s new-found liquidity, buying all $760 million of the government bonds offered at auction--at interest rates more than four points lower than those accepted last week.

On Wall Street, Standard & Poor’s summed up the uncertainty that continues to face the Mexican economy. It implemented a credit review that removed Mexico’s government bonds from its “credit watch” list--recognizing the “stabilizing effect” of the aid package--but downgraded ratings of the nation’s long-term debt because of ongoing doubts about “the government’s credibility.”

And late Wednesday, the Mexican government disclosed that its foreign reserves--which stood at $24 billion a year ago and $5 billion at the end of December--had dwindled to $3.48 billion as of Tuesday.

Underscoring the concern, Mexico’s increasingly independent Congress grilled the Zedillo administration on its future monetary policy. And the legislators angrily debated opposition calls for an extraordinary session to demand that the president and his economic team disclose the precise terms of the U.S.-led international credit package--as well as what, if any, concessions Zedillo made to win it.

Fueled by continuing insecurity, interest rates remained out of reach of most Mexicans--topping 45% for most loans. The peso steadied after early gains Wednesday, closing at 5.40 to the dollar--still about 30% lower than when Zedillo took office. And the peso’s gain was largely due to government intervention.

The Bolsa stock market index, which had soared 10.3% on Tuesday, declined 4.59%, or 96.19 points, Wednesday to 1,997.70. Analysts blamed profit taking and a more realistic perspective on the challenges that companies will face.

While foreign experts declared that the aid package eliminates Mexico’s immediate danger of default on its debt, political and economic analysts here were almost unanimous in concluding that Clinton’s rescue plan will do little to restore confidence in Zedillo’s ability to pull the country out of its morass.

“The uncertainty is not over,” political analyst Carlos Ramirez said. “What began as a crisis of confidence and credibility quickly led to a crisis of capability and, this week, entered a crisis of governance.”

“The crisis hasn’t ended,” agreed economic analyst Enrique Quintana. “The work that is left to do in the next weeks and months is to rebuild confidence to avoid another liquidity crisis in the future.

“But the crisis is not liquidity--at least not solely. . . . Resolving the liquidity crisis will simply buy time to resolve the more profound crisis that afflicts the country: the institutional crisis.”

The root of Mexico’s ills, the analysts said, is Zedillo himself. Uncertainty persists about his ability to craft new democratic institutions and simultaneously build a strong enough presidential image to win back the confidence of international investors, the Mexican people and even some members of his own ruling party.

Zedillo appeared to concede that a lack of confidence was behind the economy’s six-week tailspin.

“The foreign investors who had been investing for several years in financial instruments issued by public and private institutions in Mexico felt their confidence in our economy’s short-term prospects undermined, especially as a result of political events,” the president told members of a North American environmental institute after Tuesday’s U.S.-led bailout.

Proclaiming the “structural soundness” of the Mexican economy as a whole, Zedillo promised to maintain strict fiscal and monetary discipline and to continue promoting private investment. Answering opposition charges that the new loan package is attached to strings that dictate policy on migration and narcotics, Zedillo insisted that “these are strictly financial operations that in no way place the country’s sovereignty at risk.”

The best evidence that the immediate monetary crisis had passed was Wednesday’s auction of government securities, which indicated that interest rates may have peaked.

No dollar-backed tesobonos were offered Wednesday, and stock exchange sources said the Bank of Mexico is continuing to buy back previously placed tesobono issues. Worries that the government would default on the securities--largely held by foreigners--contributed to the panic that shook the currency and stock markets Monday.

But in a dramatic turnaround, one day after the Clinton Administration announced the international rescue package, the government was able to place its entire offering of 4 billion pesos in cetes , which have no foreign exchange guarantees.

Rates on one-year cetes dropped to 29.99%, 4.95 points lower than last week. The highest interest rate was 33.49% for 91-day bonds, 4.51 points lower than last week.

The government securities auction is usually held on Tuesdays, but it was rescheduled this week because announcement of the rescue package changed the climate and, thus, the interest rates that were acceptable to the Mexican government.

* POLITICAL FALLOUT

Clinton overstepped authority on Mexican plan, some critics say. A8