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Loan Package Doesn’t Stop Mexican Market Slide

February 21, 1995

MEXICO CITY (AP) _ The signing of a $20 billion loan package Tuesday failed to boost the Mexican stock markets or the peso.

A sharp rise in interest rates, made as part of the package’s conditions, drew investors away from the stock market. And the peso weakened on expectations that the package would fail to soften Mexico’s economic pain.

The stock market’s main IPC index was down 86.95 points, or 4.92 percent, closing at 1,679.19. The peso weakened to 5.60 to the dollar, from 5.55 Monday.

The $20 billion rescue agreement met U.S. demands that Mexico pledge to reform its economy, measures that will cause rising interest rates and possibly a recession. Yet economists said the package failed to provide enough sugar along with the medicine.

``No one knows whether this will stabilize the economy,″ said economic analyst Sergio Sarmiento. ``It is logical that it would, but since the real problem is the crisis of confidence, it will take several weeks to tell.″

The Central Bank’s announcement Monday of a rise in short-term interest rates to 50 percent from 40 percent _ a measure made as part of conditions of the package _ pato drew investment away from the Bolsa de Valores, Mexico’s stock exchange.

Analysts at large Mexican brokerages said the high interest rate makes investment in Mexican stocks less attractive, and also makes it harder for companies to draw profits.

``We thought the interest rates had topped out,″ said Fracisco Blanco, director of analysis at Arka Casa de Bolsa.

``We already knew that interest rates would be high, and that a recession was on its way, but we hoped it wouldn’t last that long. This seems deeper.″

Traders attributed the decline in the peso, meanwhile, to sales by speculators who bought in anticipation of the finalization of the U.S. guarantees. The market was also disappointed when the government failed to announce changes in the currency’s free-float system.

The Central Bank announced Tuesday it would introduce an inflation-indexed lending device that will enable banks to index principal _ not interest rates _ to inflation.

The result would be substantially lower interest rates, much closer to lender’s actual cost of funds, which currently stands at 15 percent. Government officials say borrowers might end up paying inflation-adjusted rates of 23 percent.

The move is designed to part of a package to combat inflation, boost the peso and encourage the return of investment into Mexico.

Analysts praised the move but said the government still needs to present other measures to soften the battering effects of the financial crisis.

``The markets were expecting something more,″ said Blanco.

The leftist Democratic Revolution Party called for the rejection of the loan package, saying it was ``more of the same″ economic policies which had created the financial crisis.

``Cuts in public spending, price increases, uncontrollable interest rates, floating exchange rates, instead of increasing confidence, have placed the economy in danger,″ according to a statement released Tuesday.

The package’s provision to use oil revenues to guarantee the government’s ability to repay U.S. loans may also create a political problem for President Ernesto Zedillo.

The Democratic Revolution Party called the use of oil revenues as collateral unconstitutional and a slap at Mexican sovereignty.

Update hourly