MEXICO: MEXICO MARKETS REACT WITH EUPHORIA TO CLINTON AID.
Date: Feb 1, 1995
By Martin Langfield
MEXICO CITY (Reuter) - Mexican stock prices soared more than 10 percent Tuesday, their biggest single-day gain in seven years, as investors cheered a revamped economic aid package announced by President Bill Clinton for the nation's teetering economy.
The battered peso also recovered from historic lows, closing 55 centavos higher at 5.75 per dollar after falling as low as 6.5 Monday.
After the package was announced, afternoon newspapers in Mexico City rushed out editions with grateful banner headlines reading "Viva Clinton!" (Long Live Clinton!).
Mexican President Ernesto Zedillo struck an up-beat note, saying Mexico's liquidity crisis was now "fully overcome".
But U.S. officials took a more sombre view, saying Mexico had been standing at the brink of the abyss before Clinton announced the bail-out package.
"The situation was dire in Mexico," Secretary of State Warren Christopher said. "There was the risk of default (on loans) and the problems that that would involve for not only Mexico but for the United States and for the world economy."
Finance Minister Guillermo Ortiz later denied Mexico had considered suspending debt payments.
The U.S. president, aware of the urgency of Mexico's situation, scrapped plans to try and force up to $40 billion in loan guarantees for Mexico through Congress. Instead he announced a reduced U.S. credit line of $20 billion that will not require Congressional approval.
He said the U.S. contribution would be in addition to an enhanced credit line of $17.5 billion from the International Monetary Fund and a "short-term lending facility" of $10 billion from the Bank of International Settlements.
Ortiz said Mexico's credit lines from abroad now added up to $50.76 billion, and the U.S. component could now be paid back over 3-10 years instead of 3-6 months as previously.
He added that a $3 billion commercial bank package for Mexico, not included in the Clinton plan, should also be ready very soon.
A sense of euphoria mingled with relief rippled through Mexican markets, sending interest rates lower as the stock market soared and the peso recovered.
"People cheered up a lot in the market with the announcement of the economic aid because the fate of the credit was what had provoked all the uncertainty," one stock market trader said.
Ortiz said Mexico believed the peso was now "very undervalued" and would strengthen against the dollar.
Clinton spoke to Zedillo from aboard Air Force One and urged him to stick to a strong, credible economic programme as well as honour previous commitments regarding immigration, law enforcement and narcotics control.
Zedillo, in his statement, pledged no slackening of fiscal discipline.
"The financial package that was announced this morning means that the liquidity problem in the Mexican economy is fully overcome," he said. "The financial package in no way implies the slackening of our own efforts."
He said the credits would be used to exchange high-cost short-term debt for longer-term, cheaper borrowing, and that Mexico's overall foreign debt had not increased.
The Mexican central bank, which had been facing a potentially difficult auction this week of its dollar-denominated Tesobono securities, decided simply to declare the auction void after Clinton announced the new deal.
"We stopped the auction after Clinton's remarks," a Banco de Mexico spokesman told Reuters.
Investors had asked for sky-high interest rates of up to 40 percent to cover their risk in buying Tesobonos, the securities that are at the heart of Mexico's six-week-old economic crisis because of fears that the government might not be able to repay them.
Ortiz told reporters the government was going ahead with existing schemes to offer investors alternatives to their dollar-denominated Tesobono holdings.
Mexico's crisis broke Dec. 20 when Zedillo's fledgling government devalued the new peso and then let it float on world markets. It took the action because of declining confidence that Mexico could sustain a rocketing trade and current account deficit with the rest of the world.
(c) Reuters Limited 1995. All rights reserved.
