MEXICO’S FINANCIAL CRISIS : Mexico Must End Chiapas Turmoil Soon, Analysts Warn : Stability: Foreign investors who regained tenuous confidence in country after devaluation may leave again.

As the Mexican government’s military crackdown in the southern state of Chiapas intensifies, economic analysts are warning that a quick resolution of the latest political crisis is essential to avoiding another round of serious financial problems.

Foreign investors on Sunday were monitoring both the military’s hunt for leaders of the Zapatista rebellion in Chiapas and the elections in the prosperous western state of Jalisco, where candidates of the long-ruling Institutional Revolutionary Party (PRI) were running behind opposition candidates in pre-election preference polls.

If the military operation in Chiapas doesn’t end quickly--or if the Jalisco election results provoke violence--foreign investors who had regained a tenuous confidence in Mexico’s prospects following the devastating devaluation of the peso in December will again be scurrying for the border, said Nora Lustig, an analyst with the Brookings Institution in Washington.

The potentially explosive political events are taking place just as the Mexican government prepares to introduce, possibly as early as this week, a new, dollar-denominated bond maturing in four to six years. The new bonds will replace the short-term tesobonos, which are similar to U.S Treasury bills.

The bond sale will provide a strong indication of investor confidence in Mexico and thus will help signal whether the international rescue package engineered by President Clinton--now worth close to $60 billion--is likely to succeed, said Lawrence Goodman, a Latin American economist with Salomon Bros. in New York.

“It’s clear that the events in Chiapas are an approach by President Zedillo to demonstrate a firmer grasp on the management of the country,” Goodman said. Financial markets have thus far reacted favorably to Zedillo’s decision to send the military to arrest the Zapatista leaders, but the tables will likely turn quickly if the operation bogs down.

Meanwhile, the Institute of the Americas, a think tank on the UC San Diego campus, announced Sunday that new Mexican Finance Minister, Guillermo Ortiz, will speak there Feb. 27 to discuss Mexico’s strategy for recovery. He is expected to reveal some anxiously awaited details of the government’s austerity program, which is designed to cut spending and keep inflation in check at the cost of lower growth and higher unemployment.

Foreign investors are hoping the Chiapas rebellion will end with a peaceful settlement in which the Zapatista rank and file accept an amnesty offer, said Lustig. But if the rebellion persists or spreads to other areas of Mexico, investor skittishness could set off a chain reaction which ultimately would weaken the peso further and cause Mexican inflation in 1995 to rise higher than the 20% to 25% that most analysts forecast.

“With Chiapas, there may be a prolonged period of hesitancy among foreign investors which could worsen Mexico’s liquidity problem,” said Colleen Morton, research director at the Institute of the Americas.

Mexico needed the international bailout package because it does not have the dollar reserves to pay off the $16 billion in tesobonos coming due this year, most of which are owned by foreigners. Its reserves were depleted last year by a massive foreign trade imbalance and by the government’s futile attempt to prop up the value of the peso. And the nation’s long-term economic strategy is dependent on heavy private sector investments, which many fear will not materialize if the political situation is unstable.

* CRACKDOWN INTENSIFIES: The Mexican Army moves to seal off Chiapas. Elections also test the government. A1