Middle classes bear the brunt of Mexico's pain

Austerity measures are causing unrest but failing to revive the economy, writes Phil Davison from Mexico City

Concepcion Gomez, a 68-year-old grandmother from the ragged Mexico City suburb of Neza, pointed to the big cardboard box at her feet. It was full of pots and pans. "These are about all I have left. But they're going to buy milk for my grandchildren."

Mrs Gomez was among hundreds of Mexicans packed into the renowned Monte de Piedad, an imposing centuries-old building that serves as the state pawn shop in the colonial centre of the capital. "I've pawned everything else. Since I can't afford anything to cook, I guess I can do without my pots and pans," she said as she queued. "The kids have got to get their milk."

Around her, Mexicans from most walks of life - sky-high interest rates ensure that the wealthy are simply getting wealthier - clutched television sets, hi-fis, musical instruments, paintings or boxes stacked with household goods. Some said they were there to pawn gold chains, watches, even a university graduate ring. Others turned their backs on reporters, too embarrassed to be seen.

The packed pawn shop reflected the depth of Mexico's economic crisis, which has shown no signs of improvement despite President Ernesto Zedillo's emergency austerity plan announced this month. Even a much-flaunted $50bn (£32.5bn) international loan guarantee package, spearheaded by President Bill Clinton with $20bn of US funds, may not be enough to pull Mexico out of the crisis, economists here predict. They say much of the money will go to repaying foreign debt and that more funds may be necessary.

International bankers who heard Mexico's Finance Minister, Guillermo Ortiz, explain the austerity plan in Washington last week insisted he had suggested the $50bn would not solve Mexico's problems but Mr Ortiz, on his return to Mexico, denied saying so.

Ten days after the plan was announced - including a 35 per cent rise in petrol prices, 20 per cent in electricity, a rise in VAT from 10 to 15 per cent and a 10 per cent limit on pay increases - it has failed to achieve a key objective of stabilising the peso and reversing the outflow of billions of dollars. The peso closed at more than seven to a dollar on Monday night - yesterday was a public holiday - less than half its value of three months ago.

Equally worrying to Mr Zedillo is the social unrest the crisis, and specifically the austerity plan, has unleashed. Farmers, labourers, shopkeepers, businessmen, lawyers and accountants were among thousands who marched to the Interior Ministry building in the capital on Monday to protest at soaring interest rates.

The base rate approached 90 per cent this week, with mortgage and credit rates hitting an astonishing 150 per cent, threatening the closure of hundreds of thousands of businesses, the creation of millions of new unemployed, and repossession of homes, cars and tractors.

Around 50 suicides in Mexico City this year have been attributed by relatives directly to financial problems.

The marchers said they were refusing to pay mortgages or credit card bills and called on the government to take the same tack by suspending payments on Mexico's crushing $140bn foreign debt. The group which organised the march, known as el Barzon (the Yoke), claims to have half a million members around the nation. The fact that it includes people from all walks of life - unprecedented in Mexico - has become an increasing embarrassment to Mr Zedillo, whose austerity plan has been attacked even by members of his ruling Institutional Revolutionary Party (PRI).

The President was forced to push the plan through without the traditional agreement from labour and business leaders. One day recently, there were100 separate anti-government protest marches in this capital of more than 20 million people.

The growing refusal to pay back debts is threatening to turn a banking crisis into a disaster. Three of the 18 banks privatised by former President Carlos Salinas de Gortari have recently been effectively taken over again by the state, the reverse of the trend international investors want to see. And the astronomical interest rates meant to attract foreign cash have frightened off investors because they suggest instability and have failed to stabilise the peso.

Since the vast majority of the 90 million Mexicans are poor - they live on a staple diet of tortillas, rice and beans subsidised by the government - it is the middle classes whose lifestyle is most affected by the austerity measures. French restaurants, jewellers' and clothing stores in the upmarket suburb of Polanco are deserted, but for American tourists taking advantage of the devalued peso.

"The problem now is there is no liquidity. People can't afford to use their credit cards or take bank loans," said Maru Ramirez, who runs a private primary school. "People are turning more and more to agiotistas [loan sharks] to get cash but they're having to give their house deeds, works of art or jewellery as collateral. Parents at my school are up to a year behind in their fees but I'm still teaching their children. We'll only get out of this crisis by sticking together."

As always during economic crises, the number of Mexicans attempting to cross illegally into the US is on the rise. Mexicans' most common conversation with me during the last few days has been: "Where are you from?" "Scotland." "Do I need a visa to go there? Could you help me get a job?"