Rescue has a price that must be paid

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The Independent Online
Mexico's new $50bn support package will not come cheap. But the cost to Mexico and the wider world is less than the cost of a complete economic collapse, which seemed a distinct possibility if the US Congress had actually voted down a bipartisan U S policy.

It is also less than the price hardline Republicans wanted to exact, which involved the loss of Mexico's sovereignty over its currency and oil assets.

Almost half the support will be pledged to back the peso and ensure that it remains convertible. This is the key to restoring confidence in the currency and keeping Mexico in the community of advanced trading nations, which it was invited to join only last year.

If they are sure they will still be able to cash their chips and get their money out of Mexico the remaining overseas investors are more likely to stay and eventually put money back into Mexico when bargains appear.

The $20bn pledged to back the peso will not be quite enough to redeem all the tesobonos, or dollar-linked Treasury bonds, that mature this year. The Mexican authorities will have to do quite a lot to help themselves. Inevitably the tax increases and the pay controls imposed last year to tighten Mexican belts will have to stay in place, although precisely how tight they can be without triggering bankruptcies and industrial unrest remains to be seen.

The slump in the peso in the past six weeks will require a drastic reduction in imports and at the same time sharply raise the cost of the goods and materials that do come in. Inflation will rise well into double figures and import volumes could be halved this year if the peso fails to rebound to pre-crisis levels. Inevitably Mexican businesses and consumers will suffer.

The need to control the money supply and attract back foreign investment will require continuing high real interest rates, which will penalise all borrowers, including businesses and the government itself.

Domestic demand seems certain to fall rather than grow this year. But Mexican companies with markets in the US should have a field day, and if confidence is quickly mended the long-term cost to Mexico and its supporters could still be relatively modest.

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