The Vacuum At The Top Is Getting Downright Scary

Two weeks after the U.S. cobbled together a $50 billion rescue plan for Mexico, the crisis seems far from over. President Ernesto Zedillo Ponce de Len's political moves are baffling both foreign investors and his own people. Voters showed their anger with Zedillo when they voted on Feb. 12 to oust his ruling Institutional Revolutionary Party from the governorship of the important state of Jalisco.

While Zedillo salvaged a measure of respect by promising to uphold the victory of Alberto Crdenas of the center-right National Action Party (PAN), that isn't checking the fall of his prestige or the collapse of Mexico's economy. Zedillo seems paralyzed over how he will use the American money and how he plans to restructure Mexico's decaying finances. Talk is circulating in Zedillo's government of putting Mexico's monetary policy under the control of a so-called currency board, in effect taking economic policy out of his hands. "We are on the verge of seeing the economy explode into pieces," says Sergio Raimond-Kedilhac, the dean of Mexico's leading business school, the Pan American Institute of Higher Business Studies.

Indeed, the business community was rocked on Feb. 15 by Grupo Sidek's default on $19.5 million in corporate IOUs. Sidek, a major tourism developer and steel producer, has $100 million in dollar-denominated commercial paper coming due in the next two months and a total of $980 million in dollar-denominated debt. Fears of other defaults shook the stock market, which was already plenty jittery over rumors that Banca Serfn, Mexico's third-largest, was under pressure. Another rumor, later denied, had it that Central Bank Governor Miguel Mancera was about to resign.

All this makes the markets very nervous. The peso and the bolsa are testing their lows, and interest rates are soaring. On Feb. 15, rates on 28-day Mexican treasury bills jumped 5%, to 40%.

Business is grinding to a halt as expectations of a severe recession begin to bite. Construction is dead. New-truck sales plunged by 86% in January, and bus sales fell by 66%, according to the National Association of Bus, Truck & Tractor Producers. Mercedes-Benz shut its two plants for three weeks in January, and Grupo Dina plans to shut down production for 60 days this year.

Many other sectors of the economy are preparing for the worst. Companies involved in services, tourism, and trade got a shock when NAFINSA, the national development bank, told the National Association of Credit Unions this week that it was cutting off government credit to the thousands of small and medium-size businesses they represent.

QUICK FIXES. Executives are pleading for Zedillo to come out of his shell. Jorge Arganis, president of the Mexican Engineering Society, says Zedillo must act to keep thousands of businesses from going bankrupt. "He must do what the U.S. did after the crash of 1929--put people to work by spending what little money they have on public works projects, road repair--anything," Arganis says. "Zedillo is frightening investors--they must see us working."

Zedillo's advisers explain that he must negotiate the details of the rescue package with the U.S. before disclosing his intentions. But delay is sparking unease, even in his inner circle. Realizing how low the government's credibility has sunk, aides to Zedillo are pondering quick-fix measures that before would have been unthinkable. At least one of the vice-governors of the central bank is said to be pushing for the adoption of a currency board, an independent group that would fix Mexico's exchange rate to around five pesos to the dollar and in effect put Mexico's monetary policy in Washington's hands. Steve H. Hanke, a currency board theoretician at Johns Hopkins University in Baltimore, says the idea is being considered in Mexico at the highest levels of the central bank and in the government. Hanke gives it a better than 50% chance of being implemented. Some Wall Street professionals favor a currency board because it would promise a stable exchange rate and a more certain repayment of investors.

But most analysts think that Mexico is too complex to be cured by magic bullets. What's wanted is a sensible program and sound leadership from Zedillo. The former may be in the works, but there's little sign of the latter.