MEXICO CITY — Mexico's economy passed a crucial test of stability and confidence Tuesday when investors bought all $400 million of the dollar-backed bonds called tesobonos offered at the weekly auction of government securities.
The news sent a spurt of optimism through Mexico's stock and foreign exchange markets, which have been particularly volatile since the peso was devalued nearly a month ago.
The Mexican Stock Exchange Index, which had been slipping in early trading, jumped 23 points, then resumed its slide to close down 33.52 points, or 1.49%, at 2,209.49. The peso gained 23 centavos to close at 5.30 to the dollar.
Markets calmed last week after the Clinton Administration promised a $40-billion rescue package, but Tuesday's auction was considered a key indicator of whether the crisis was easing.
The positive response from investors--even as Federal Reserve Board Chairman Alan Greenspan and other top U.S. officials briefed members of Congress behind closed doors to rally support for the rescue--was considered encouraging.
"Perhaps it's too early to ring the bells, but it is a good sign," Francisco Blanco, director of analysis for the Arka brokerage here, told reporters.
Tuesday's successful tesobono sale could signal an end to the immediate crisis and show that the peso may stabilize at current levels. And by showing that foreign investors may be more willing to come back to Mexico, the sale also could allow the government more time and flexibility to attack pressing economic problems and implement the recovery plan announced two weeks ago. The plan calls for more privatization of government-owned companies, stiff wage controls and cuts in government spending.
But the high interest rate the central bank had to offer on the tesobonos --an annualized 19.75%--is an indication of how difficult the challenges are for Mexico's beleaguered economy. Government officials had said they hoped to keep inflation below 20% and see modest growth in 1995, despite an expected reduction in the foreign investment that has fueled the nation's economy in recent years.
However, high interest rates stifle growth and push inflation higher, analysts warn. Economists and observers outside government are now predicting a recession in 1995 and major difficulties in preventing a resurgence of the inflation that ravaged Mexico in the 1980s.
Last week, investors deserted government securities, buying only $63 million of the $400-million tesobonos offering, despite a record interest rate of 20%. That provoked a capital drain, forcing Mexico to draw $500 million from earlier U.S. and Canadian credit lines. The credit was offered to stabilize the economy in the wake of the government's devaluation of the peso Dec. 20. The peso's value has fallen by a third since that date.
Another hit had been feared this week, when $912 million in tesobonos will mature. Those fears were eased somewhat with Tuesday's auction, despite the slightly lower annualized interest rate.
The current economic crunch was provoked by investor fears of political instability after a year of political assassinations and a smoldering rebellion in the southern state of Chiapas. As more dollars fled Mexico after each political blow, the central bank dipped into foreign reserves to prevent a devaluation, spending nearly $20 billion.
With just $5 billion in reserves left, the new Mexican administration was forced to devalue three weeks into its term.
A poll to be published Thursday in the political magazine Etcetera shows that 69% of the 1,100 Mexicans interviewed nationwide believe that the previous administration deceived the populace about Mexico's economic condition. Only 38% believe that President Ernesto Zedillo--a Cabinet member of the previous government--has handled the current crisis capably.
The Mexican government has resumed peace talks with the rebels and brokered a power-sharing agreement among the major political parties, which is expected to calm unrest.
Mexico's economic crisis has revived many of the arguments that surfaced on both sides of the U.S.-Mexico border during the debate over the North American Free Trade Agreement, which unites the United States, Mexico and Canada in trade. U.S. congressional leaders have threatened to raise NAFTA-related issues when they consider the rescue plan, seeking economic, labor, immigration and other conditions.