Peso crashes again in a no-confidence vote against Mexico headline dec kyy

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The Independent Online
Mexico's currency fell for the second day running in a dramatic vote of no-confidence by the financial markets in the emergency economic plan announced on Tuesday. In early trading the new peso fell sharply against the dollar. Bond and share prices followed suit.

As markets opened, the peso fell 20 centavos against the US currency, to 5.5 pesos, after a 40-centavo fall on Tuesday. The currency closed 25 centavos lower at 5.6 to the dollar.

Interest rates on government debt increased 10 percentage points to more than 30 per cent after the weekly auction yesterday. Share prices on the bolsa lost 4.5 per cent of their value in the first few minutes.

Argentinian and Brazilian shares fell in sympathy.

Guillermo Ortiz, Mexico's finance minister, flew to New York for meetings with banks and investors. A spokesman said: "It's going to be a pep talk."

Although authorities ranging from the International Monetary Fund to the US administration welcomed the plan outlined by President Ernesto Zedillo, it has clearly failed to restore the confidence of the financial community - despite the $18bn international rescue fund to defend the peso. The government's credibility in the markets was shattered by an unexpected devaluation of the previously fixed peso exchange rate on 20 December, and by the Mexican government's inept handling of the crisis that has since unfolded.

The emergency plan involves cuts in government spending, a pact with union leaders limiting wage rises to 10 per cent, and additional privatisation and deregulation of the economy. Analysts fear that the tough measures, which will more than halve expected growth this year, will be unacceptable to the Mexican people. Javier Maldonado, chief analyst at Mexican bank Bancomer, said: "These measures are going to be very bitter."

Talks with labour representatives before the announcement of the plan dragged on for 20 hours. Yet without wage restraint, the government would find it hard to halt a surge in inflation as a result of devaluation and higher import prices.

However, most observers thought the measures were necessary. "The plan has the essential elements," said Nora Lustig, a researcher on the Mexican economy at the Brookings Institute in Washington. But she added that its outcome depended on popular acceptance. "If people believe the crisis will be short-lived, the chance of success is pretty high," she said.

Mickey Kantor, the US Trade Representative, described Mexico's economy as fundamentally sound. He defended the North American Free Trade Agreement.