Last week no country was sheltered from Mexico’s chaos. Suddenly, investors everywhere saw quicksand where, only days earlier, there’d been solid ground. In Europe, traders trashed the Swedish krona. In Bangkok, the Bank of Thailand sweated over the baht. Moving money before it lost value was the name of the game. “People are very prone to trading by sound bite,” said Ravi Bulchandani, head of currency research at Morgan Stanley, as he watched the Canadian dollar hit banana-republic levels. “Mexico is collapsing as an attractive sound bite.” Amid alarm that financial panic could sweep Latin America, the United States mounted a $40 billion rescue plan that finally stabilized the peso. Said Assistant Treasury Secretary Lawrence Summers, “We’ve acted to prevent the crisis.”
What makes Mexico’s illness so contagious is that investors sense an economic turning point. “This is not just about the crisis in Mexico,” says Alan Stoga, a consultant with Kissinger Associates in New York. “It’s about how we’re going to finance the world economy in the next few years.” Since 1990, developing countries have been flooded with money seeking something more than the meager returns available on German bonds and U.S. certificates of deposit. That cash, on the order of $650 billion, has financed highways and phone systems from Brazil to Indonesia. Without it, Latin America’s miraculous turnaround wouldn’t have happened. But now, with countries in every corner of the world growing in unison for the first time, the era of bargain-basement interest rates is over. Germany may lift rates later this month. U.S. rates are all but certain to climb further, and Japan, which needed easy money to climb out of a long recession, will likely tighten as well. With top-rated U.S. corporate bonds paying 8.6 percent interest, investors figure, why bother with Malaysian stocks and Venezuelan bonds? The risks are too high, the returns too uncertain.
The new rules of global finance became brutally clear last week. Rectitude will be rewarded. Any country with a weak government (Spain, Italy), a large budget deficit (Sweden, Canada) or a less than credible economic policy (Mexico, the Philippines) will have an uphill battle to draw money. “Investors may become more discriminating,” predicts Toyoo Gyohten, chairman of the Bank of Tokyo. Countries that don’t save much domestically will have a tougher time tapping funds from abroad. Those that get the cash will have to pay more. And the days when a nod of approval from Chase Manhattan or J.P. Morgan could smooth over financial bumps are gone, now that “emerging market” mutual funds are on the scene. Finance ministers ignore the foreign public at their peril. “Now we know that it’s the small U.S. investor who calls the shots,” says a top aide to Mexican President Ernesto Zedillo.
The monetary mayhem will have only a minor impact on Americans. Exports to Canada and Mexico will fall, and fewer foreigners will flock to border-front WalMarts and Kmarts. But in many countries, the turmoil translates directly into lower living standards. Brazilian companies canceled overseas bond issues – which means less investment to create new jobs for the poor. In Chile, textile maker Fuad Garib’s expansion plans were quashed when Garib’s first Mexican order, half finished, was abruptly canceled. For the upper middle class, weaker currencies mean an end to the import boom that has put a VCR in every living room and a Ford Taurus in many a garage. That’s why, last Thursday, housewives from Mexico City’s tony Bosques de las Lomas neighborhood demonstrated, with maids to carry their picket signs, and scuffled with riot police-outside Zedillo’s official residence. “I’ve seen devaluations strike blows at my father’s generation, at my generation,” said Cecilia Albarran, whose family owns a metal factory. “I will not stand by and watch it ruin my children’s generation.”
Washington, which had deliberately kept a low profile since the peso first plummeted on Dec. 22, got involved in earnest only after Zedillo called Bill Clinton for help. Clinton and Republican leaders quickly set aside their struggles: Republicans gave Clinton crucial votes for the North American Free Trade Agreement in 1993, so they share a stake in Mexico’s success. Their one demand was that Clinton think big, so he wouldn’t have to add money later. The administration responded almost overnight. On Friday it unveiled loan guarantees that would let Mexico redeem $28 billion of dollar bonds and, in the process, inject cash into its troubled banks. The Mexicans will pay about $2 billion if they use all the guarantees, and they may have to put up oil revenue as collateral -measures that let Congress deny it’s handing out foreign aid.
Washington’s move bought time, but crisis still hangs heavy in the air. “We avoided meltdown this week, thanks to Clinton,” said a floor trader on Mexico City’s Stock Exchange. “But we’re far from out of this.” Diehard opponents of NAFTA are using Mexico’s woes to demand an end to the trade pact. Mexican technocrats, meanwhile, are still trying to put their shattered economic plans back together. Mexicans, many of whom earn less now than they did a dozen years ago, are resigned to more hard times. But Zedillo’s speech last Wednesday imploring his countrymen to “generate more domestic savings” didn’t exactly hit the right chords. “In times like these, you have either a Franklin Roosevelt or a Herbert Hoover at the helm,” says Mexican political scientist Sergio Aguayo. “I’m afraid we’re stuck with a Hoover.” Of course, even Roosevelt couldn’t manufacture a quick recovery from the Great Depression-and he didn’t have money managers halfway around the world forcing his hand.
MEXICO’S STOCK-MARKET INDEX
Ernesto Zedillo is inaugurated as Mexico’s president for a six-year term, succeeding Carlos Salinas de Gortari.
A new governor takes office in the impoverished south-eastern state of Chiapas amid fears that the Zapatista rebels will break an 11-month ceasefire.
Unrest in Chiapas, higher U.S. interest rates and rumors that Mexico is running short of foreign currency reserves put pressure on the peso, worth 28 U.S. cents, and on the stock market.
The U.S. government pledges support. Zedillo ousts Finance Minister Jaime Serra Puche, replacing him with veteran finance official Guillermo Ortiz.
The government, which had kept the peso’s value in a narrow range, drops the limit to about 25 cents.
As traders dump pesos, the currency hits the floor; Zedillo decides to let the market value the peso. It falls to 20 cents. Latiin American stocks tumble.
After unusual delays, Zedillo unveils an emergency plan calling for price and wage restraints to stem the inflation that the peso’s collapse will cause. The United States, Canada and a group of banks pledge $18 billion to support the peso.
Ortiz jets to New York, but Wall Street wants more budget cuts than he can promise. The peso hits a, new low: 17 cents. The next Moody’s downgrades Mexican bonds.
Anxiety spreads in foreign exchange markets around the world as investors flee to the most stable currencies. Zedillo cautions Mexicans that tough times lie ahead, and tells them to save more. The Federal Reserve and the Banco de Mexico begin a coordinated effort to buy pesos, and the Mexican currency finally steadies.
Clinton announces loan guarantees. Some Mexican stocks rebound, and the peso climbs back to 19 cents.
