Mexican President Nixes Plan to Link Peso, Dollar

Mexican President Ernesto Zedillo on Friday ruled out linking the peso with the dollar, saying supporters of that policy see it as a “magic solution,” even though “magician’s tricks don’t work” in the real world.

Zedillo said in an interview that he doesn’t intend to change the policy of a free-floating peso, even after the currency has plunged as much as 25% in the last six months as investors fled emerging markets. His focus will remain on tight fiscal and monetary policies to tackle the effects of slowing growth during the present global economic upheavals.

“I don’t see any sound reason to discuss [changing] a regime that has been particularly useful at the present time,” Zedillo said during a state vistit to London.

Some Mexican business owners and others have been calling for a “dollarization” of the economy by linking the peso to the dollar to firm up the exchange rate. The Mexican government has been forced to cut its spending three times this year and has raised interest rates to defend the currency.

Global financial turmoil has pummeled the peso this year. At the end of last year, one dollar bough 8.05 pesos. At Friday’s close, a dollar bought 10.04 pesos, a depreciation of about 20%--a greater fall than in any other Latin country.

Zedillo said he didn’t rule out tax increases to boost revenue in these troubled times: “We have to have fiscal and monetary stability under any circumstances.”

Finance Minister Jose Angel Gurria said earlier this week that government spending at 15.7% of gross domestic product this year would be the lowest since records began.