Mexican guerrillas hold peso to ransom

PHIL DAVISON

Latin America Correspondent

Stunned by the collapse of the peso and a stock-market slide, the Mexican government backed down yesterday in its latest dispute with the Zapatista peasant guerrillas in the state of Chiapas.

The Attorney-General's office freed Fernando Yanez, a former 1960s guerrilla leader who they say is Comandante German, co-founder of the Zapatista National Liberation Army. He was arrested last Saturday on charges of illegal possession of an AK-47 rifle and a pistol. He said they had been planted by police.

His detention sparked new unease in Chiapas. The guerrillas went on military red alert and their leader, Subcomandante Marcos, considered breaking off long-running peace talks with the government.

The threat of renewed warfare in Chiapas was a key factor in Thursday's collapse of the peso, which fell by 6 per cent through the pyschological level of seven to the dollar, to close at 7.23. Disappointing economic data added to what dealers described as "sheer panic". The peso picked up slightly yesterday, to 7.13 to a dollar by early afternoon, but dealers said the market was still volatile.

On Thursday the government disclosed that the economy had contracted by 5.8 per cent in the first half of the year, casting doubt on President Ernesto Zedillo's insistence on a turn-round into positive growth by the first quarter of 1996. Inflation statistics were also disappointing, with 1.1 per cent for the first half of October, suggesting the predicted rate of 45 per cent for 1995 would be hard to achieve.

As always after economic sneezing in Mexico, stock markets from Buenos Aires to Wall Street caught colds. Although there were other factors on Wall Street, the Dow Jones industrial average had its worst day in three months. American investors recall that Mexico's last crisis, which forced the US to spearhead a $50bn (pounds 32bn) international bail-out, followed hard on unrest in Chiapas.

The latest run on the peso was the third time the Zapatista tail has wagged the Mexican dog on currency and stock markets since Mr Zedillo took office last December. A brief Zapatista occupation of Chiapas towns last December undermined Mr Zedillo's control and sparked peso selling. Mexico's underlying financial problems were the reason for the ensuing economic crisis, but the Zapatista move was a catalyst.

In February, Mr Zedillo's credibility was further battered after he ordered a military assault on the Zapatistas and announced arrest warrants for its non-Indian, intellectual leaders. After an outcry, he backed down and halted the assault. The warrants were later suspended as peace talks began.

The apparent breaking of this promise in the case of Mr Yanez angered the Zapatistas and their supporters throughout Mexico, even though he denied any link with the Zapatistas. After Thursday's economic damage, however, the government apparently decided releasing him was worth the price.