Central Bank Moves to Bolster Peso

After watching the nation’s currency tumble to unprecedented lows for a fourth consecutive day, Mexico’s central bank scrambled to bolster the peso in the final hectic hours of trading after a wild speculative ride that underscored the volatility of Mexico’s financial markets and its economy as a whole.

The Bank of Mexico confirmed that it had intervened to support the peso, the first time it had done so openly since early this year. The move drove the peso back up--but was also seen as another example of the inconsistent economic policy that has been blamed for the market’s weakness.

Analysts said Thursday’s wide fluctuations in the value of the peso, which traded as low as a record 8.3 to the dollar at midday but closed up more than 2% at 7.6, fuels investor perceptions of weakness, conflict and credibility gaps among President Ernesto Zedillo’s economic team.

Just days ago, government officials had insisted the peso would be allowed to float freely against the dollar, even if it were to weaken further. “We have to live with this volatility right now,” a spokesman for the government, said earlier in the week.

“The market is overshooting on the perception of weakness in the government, but that perception is entirely correct,” said independent Mexican economist Rogelio Ramirez de la O. “What is lacking is a realistic economic policy. What we need is an economic orchestra with an effective orchestra conductor.”

But in Washington, a senior U.S. Treasury official endorsed the move, despite the fact that Mexico’s efforts to support the peso last year led to the steep decline in foreign reserves that triggered December’s peso devaluation and the country’s economic crisis.

“Markets have been disappointing,” said the U.S. Treasury official. “This shows how difficult it is to fully regain and hold market confidence once it is lost.”

Mexican officials declined to say how they intervened. However, news reports said the Bank of Mexico had sold dollars.

Zedillo’s top economic adviser, Treasury Secretary Guillermo Ortiz, indicated that this week’s peso crisis would not deter the government from its economic-rescue plan.

“It is fundamental to maintain the direction of the current economic program,” Ortiz told a group of Mexican Congress members on Thursday. “We are certain that this program is going to work, that in 1996, we are going to have a recovery of economic growth.”

Reacting to a week in which the peso has lost more than 10% of its value--after 11 months that already had slashed it nearly in half--many analysts specifically blamed a rash of unfounded rumors about resignations in Zedillo’s Cabinet, a sharp jump in interest rates and mixed signals from the government and private sector on a proposed peso-support fund.

That uncertainty, they said, culminated in Thursday’s wildly erratic trading. Mexico’s stock market, for example, closed up 3.43% as speculators apparently took advantage of the cheap peso.

Many analysts in Mexico City and New York agreed that the peso ultimately will stabilize on its own. But they concluded that Zedillo must make some dramatic moves to restore confidence in his 11-month-old government if he is to keep the peso from spinning out of control. So far, they said, nothing else has worked.

An 11% rise in interest rates on bellwether government bonds this week should have attracted foreign investment that would have boosted the peso. It did not.

A proposal to create a $5-billion account--funded by private, export-oriented corporations and possibly the government--that would intervene when the peso sags was supposed to stabilize the currency. But it appeared all but dead Thursday after widespread criticism of the scheme.

And Zedillo’s skill in reaching agreement with business and organized labor--he signed a formal accord setting ceilings on wage hikes and prices on Sunday--should have boosted confidence in his government. But the markets rallied only briefly Monday before the peso again began to fall.

“People just don’t have confidence in the currency, and that’s partly due to a lack of credibility in the government,” says Vinod Sehgal, senior vice president of the International Equity Department at Oppenheimer & Co.

After several months of relative stability during the spring and summer, he said, “the peso has been dropping sharply for one and a half to two weeks, and frankly I can’t draw the conclusion from today that it’s over. In September, people thought the economy had begun to turn around, but then they realized that even 1996 is going to be difficult. There is a credibility issue here.”

Analysts agreed that this week’s debate about the peso-support fund was a clear example of what not to do.

“The bottom line is Mexican corporations don’t have the money that’s needed [to back the peso]. It’s a joke, highlighting the dichotomy between reality and statement, and doing even more damage to the peso,” Oppenheimer’s Sehgal said.

“I think the volatility will remain in the short term . . . and there could be a significant impact on the prospects for an economic recovery in 1996. It could be a very difficult year.”

Illustrating the depth of frustration and the breadth of challenges facing Zedillo, his Cabinet on Thursday was focused not on a tumbling peso that appears to be outside its immediate control but on the nation’s crisis-ridden social security system. Mexico’s deep recession has thrown more than a million people out of work and triggered thousands of bankruptcies.

“Social security would be at grave risk in four years if we continued the current practices,” declared Zedillo’s labor secretary, Javier Bonilla, after the president submitted to Congress a bill to radically reform the pension and health-care system for 9 million Mexican workers. The president’s bold overhaul, which includes partial privatization, would take effect Jan. 1, 1997, Bonilla said.

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Times wire services contributed to this report.