Peso Hits Historic Low Against Dollar, Rattling Investors

Mexico’s peso hit a historic closing low against the dollar Wednesday as investors despaired over the slow government response to the country’s economic crisis and dollar debt payments loomed.

Analysts said the lack of a concrete economic plan to back up $20 billion in U.S. aid to Mexico continues to rattle investors, sinking the peso and driving interest rates higher.

In a shocked market where dollars are like gold, modest demands by firms for the U.S. currency to make debt payments abroad are fanning fears that the private sector--and even the government--may be forced to default.

“The market is very thin, there are few dollars and companies have to pay their debts,” said Alejandro Mercado, market analyst at Banorte brokerage.

The new peso, as the currency is officially called, sank 21 centavos to 7.02 per dollar, more than 50% below its level against the dollar when it was first devalued Dec. 20.

It was the first time it has crossed the threshold of seven new pesos since the devaluation.

The falling peso makes debt payments more expensive. Analysts warned that the government may have a hard time servicing its debts in the next few months.

According to Michael Pettis of the Weston Group, a New York investment bank, Mexico may need ready access to all of the U.S. and International Monetary Fund aid to meet the growing need for dollars between now and June 30.

So far, funding is being made available in piecemeal fashion, which “in a worst-case scenario may push Mexico into a suspension of payments,” he said, quoting a draft report being prepared by the bank.

Pettis stressed, however, that the likelihood of such a drastic step is low. He said he expects U.S. and IMF disbursements to be speeded up if Mexico approaches default.

Throughout the week, Mexican markets have been in the grip of malaise, with investors exasperated over the government’s failure to announce economic steps to stem the crisis.

President Ernesto Zedillo promised to unveil new remedies after the Mexican Congress approved the $20-billion U.S. bailout effort.

That approval came overnight, but there was still no word on the new plan. Delays in Zedillo’s announcement affected the stock market: The beaten-down Bolsa index fell another 25.68 points, or 1.7%, to 1,498.52. Traders worried that this showed Zedillo may be having trouble winning the support of the business community.

* POLITICAL CRISIS

Zedillo labors to complete new emergency economic plan. A10