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Peso Strengthens as Mexican Government Unveils Austerity Measures

March 10, 1995

MEXICO CITY (AP) _ The government is asking Mexicans already stung by rising prices to swallow a bitter pill of tax hikes, wage restrictions and other austerity measures to help cure the country’s worsening economic crisis.

``In the short term, this program is going to be difficult for all Mexicans,″ Treasury Secretary Guillermo Ortiz said late Thursday after unveiling the harshest government measures yet to stabilize the economy. ``But there is no easy exit.″

Investor reaction to the plan was almost immediate: The peso strengthened early today. It was trading at 6.70 to the dollar, up from 6.80 at the opening. On Thursday, before the plan’s announcement, the peso had fallen to an all-time low of 7.45, roughly half its value before a devaluation in December.

Mexico’s bellweather stock, Telefonos de Mexico, was up 1 3/4 points to 26 1/4, leading the New York Stock Exchange’s most active list this morning. Other Latin American stocks were broadly higher in New York.

In Washington, the Clinton administration today announced it was freeing up $3 billion more in funds to help ease Mexico’s financial crisis as former Federal Reserve Chairman Paul Volcker expressed support for the U.S. rescue effort.

There was widespread relief in the international sector to Mexico’s long-awaited plan, which is tough in that it calls for boosting the general sales tax from 10 percent to 15 percent, increasing electricity and gasoline prices by up to 35 percent and raising other fees.

Starting in April, increases in the minimum wage will be held to 10 percent for 1995, Ortiz said. Other salaries will be freely negotiated by management and their employees.

But subsidies to keep down the price of such basic foodstuffs as bread, tortillas and milk will continue in an effort to blunt the hardship on the poorest Mexicans. There will be no other price restrictions.

In explaining how the crisis was caused by Mexico’s trade deficit, Ortiz likened the country ``to a family that spends more than it earns, having to cover the difference wtih borrowed resources.″

Business leaders late Thursday cringed at the plan, but admitted something must be done.

``We don’t like the measures, but we have to move forward,″ said Fernando Legarreta, president of the Confederation of Chambers of Industry. ``We want the plan to work. We already have overcome more difficult situations.″

``This project will be difficult for society, but we have arrived at the conclusion that there are no other options,″ added Luis German Carcoba, president of Mexico’s Business Coordinating Council.

The entire business community isn’t expected to be so accepting of the plan. Even before the plan was announced, business owners had begun protesting expected tax increase.

Ortiz predicted the measures will result in a temporary increase in inflation the first two-thirds of the year, falling in the last four months, and finally settling at an annual rate of about 42 percent.

At the same time, Mexico’s gross domestic product is expected to fall during the first eight months of the year and recover in the last trimester, with the economy shrinking 2 percent next year, Ortiz said.

The peso was worth about 28 cents when it began sliding on Dec. 20 but is now worth 13.4 cents.

President Ernesto Zedillo’s plan had been awaited for more than a month, and the delay was blamed in part for the peso’s slide.

The new plan also calls for tough monetary measures designed to restrict the nation’s money supply in hopes of halting the peso’s slide and limiting inflation.

The peso will continue to be allowed to float freely against the dollar, despite its precipitous decline since Dec. 20, as the central bank’s reserves are too low to defend the currency.

As for banking policy, Ortiz said Mexico would draw on financing from the World Bank, the Inter-American Development Bank and other sources in the future to help bolster Mexican banks, hit particularly hard by the crisis.

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