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Economy Continues to Sink Despite U.S. Aid

February 28, 1995

MEXICO CITY (AP) _ Even no news seems to be bad news for Mexico, whose stock market and peso have tumbled sharply yet again.

Investors worried by a lack of news about government plans to deal with the nation’s economic crisis sent the Mexican stock market plunging on Monday. It recovered only slightly by midday today.

The main market index fell by 106.37 points, or 6.9 percent _ the largest percentage drop in more than a year. The close of 1,447.52 was a low the market had not touched since October 1992.

The index edged back up to 1467.23 by late this morning, a recovery of 1.4 percent.

The peso, too, fell on Monday. Worth about 29 cents in mid-December, it closed Monday at 16.8 cents, down from 17 cents last Friday. One dollar now buys 5.945 pesos.

The government has been struggling to halt an economic plunge that started Dec. 20, when it became apparent that it no longer had the foreign reserves to protect the peso and meet short-term foreign debt payments.

Meanwhile, for the second week in a row, the government today scrapped a sale of dollar-linked bonds known as tesobonos because investors hoping to reap high profits from the Mexican crisis were seeking costly yields.

There were bids for more than $1 billion in the bonds despite only $150 million on offer. But investors were seeking yields of up to 24.05 percent for three- and six-month bonds and up to 26.98 percent for one-year tesobonos.

Even a U.S.-led international aid package announced Jan. 30 and completed on Feb. 21 has failed to halt the market’s slide, wobbles in interest rates and the peso’s decline. Tough austerity measures demanded by the agreement have led to gloom about the economy.

Investors had expected the government to announce new, more skeptical economic targets for 1995 over the weekend. But none materialized, leaving crucial questions about the government’s projections for inflation, interest rates, the peso, wages, government spending and the economy.

``When investors have to ask questions like that and don’t have the answers to them″ the market suffers, said Felix Boni, an analyst at the Mexican brokerage company Interacciones.

Francisco Blanco of the Arka stock brokerage said investors were jittery also over unconfirmed reports of new shifts in President Ernesto Zedillo’s cabinet and the effect of a decree last week forcing banks to increase the amount of money set aside to cover losses from bad loans.

Treasury Secretary Guillermo Ortiz admitted on Feb. 22 that the government would find it hard to reach the financial targets it had set soon after the crisis began: 19 percent inflation, an exchange rate of 4.5 pesos to the dollar and economic growth of 1.5 percent.

Private analysts have projected inflation at closer to 30 percent and say the economy is likely to shrink overall this year.

The crisis has hit interest rates hard. Mexico’s dollar-linked treasury bills sold last week at a 59 percent interest rate, and mortgage rates are at nearly 100 percent _ stifling credit and raising fears that loan defaults could imperil banks.

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