Mexico desperately needs the comic relief. After three months of turmoil, the country’s economic and political crisis is accelerating – and the shocks keep coming. Salinas, fresh from a hunger strike to protest claims that he tolerated corruption, popped up in New York last week with a bizarre interview denying that he’d been sent into exile. Back in Mexico City, interest rates hit an eye-popping 92 percent as the government of President Ernesto Zedillo struggled to save the banking system from collapse. And the announcement that the 1993 murder of Guadalajara’s Cardinal Juan Jesus Posadas may have been a deliberate hit by drug traffickers, not a case of mistaken identity, fed fears that drugs dominate far more of Mexican life than even experts had imagined. The spectacular string of events, coming atop a precipitous drop in living standards, only intensified the sense that Mexico is imploding.
That threat has Washington on edge. A full-blown collapse would be disastrous for the United States, sending hordes of migrants north and destroying economic links affecting millions of Americans. Fear isfueling a search for scapegoats. Congressional Republicans are probing the administration’s dealings with Mexico, while foes of NAFTA, the 15-month-old North American free-trade pact, see a conspiracy to cover up Mexico’s true condition. But bad as the situation is, the rhetoric exaggerates Mexico’s woes. The debate over Who Lost Mexico makes false assumptions about how financial markets work, about Washington’s ability to dictate events – and, most of all, about whether Mexico is even lost (following story).
No forecaster could have predicted the stunning disintegration of Mexico’s economy that began on Dec. 20. But the problems that would lead to the peso’s collapse were anything but secret. From the onset of Salinas’s rule, in 1988, foreign capital was critical to reshaping a moribund economy. High interest rates and a steady peso drew in billions of dollars from U.S. mutual funds and pension funds. The mood changed abruptly last winter, when a little-known guerrilla movement occupied towns in the southern state of Chiapas, bloodying the country’s carefully crafted image. Then, after the March shooting of Salinas’s expected successor, Luis Donaldo Colosio, investors dumped $25 billion of the government’s peso bonds – showing they expected a big devaluation. ““The market had voted with its feet,’’ says First Chicago Corp. strategist Daniel Wilson.
That opinion was widely shared. ““Anyone who conducted business with Mexico or traveled in Mexico . . . knew the peso was overvalued,’’ says Kevin Middlebrook of the University of California, San Diego. The World Bank favored a cheaper peso to shrink Mexico’s trade deficit. So did the U.S. Treasury, which privately urged a devaluation of 30 percent or more. Why not publicly? Says Treasury Under Secretary Lawrence Summers: ““It is not appropriate for government officials to unsettle private markets.''
Not that Mexico was hanging on Washington’s opinion. A big devaluation before the August election was out of the question. A strong peso meant cheap Buicks and bluejeans, and happy consumers were vital if candidate Zedillo was to maintain the Institutional Revolutionary Party’s 65-year hold on power. Pedro Aspe, the powerful finance minister, promised that the peso wouldn’t budge. Last May, sources say, Claudio Gonzalez, CEO of Kimberly-Clark de Mexico and a close Salinas adviser, went ballistic at an investor meeting where economists urged devaluation. ““Next year the peso will be even stronger than it is now,’’ Gonzalez reportedly yelled. (Gonzalez didn’t return Newsweek’s calls.) The longtime Central Bank chief, Miguel Mancera, rejected devaluation, too; Mexico’s trade deficit and vast appetite for foreign capital were signs of much-needed investment in roads and factories, Mancera believed.
Foreigners may have feared the peso, but they didn’t flee. Instead, U.S. money managers pumped $14 billion into short-term dollar notes – tesobonos – that were safe from devaluation. Funds like the $12 billion Fidelity Asset Manager, which doesn’t tout itself as an international fund, bought heavily, giving unsuspecting investors a stake in Mexico’s ability to service its debts. After Zedillo’s sweeping victory, stock strategists touted Mexico, too. ““It is time for investors to refocus attention south of the border,’’ Smith Barney Shearson proclaimed. And what of devaluation risk? Shrugs Juan Mesa of J.P. Morgan, another of last fall’s bulls, ““If somebody forecasts a devaluation and we wait five years for the devaluation, a lot of money is lost.''
Wall Street wasn’t the cause of Mexico’s crisis, but its excessive enthusiasmfor Mexican investments left Americans bearing much of the loss. Many money managers blame the Mexican government for hiding the facts. Thatexcuse doesn’t wash. Moody’s and Standard & Poor’s, the leading bond-rating agencies, had accurate estimates of how fast Mexico was running out of dollars and called Mexico a high-risk credit. But those warnings were lost on the youngsters who’d ridden the emerging-markets boom of the early ’90s. Many were too young to recall the Mexican debtcrisis of 1982. Robert Citrone, who helped Fidelity become probably the largest holder of tesobonos – the company won’t reveal its total holdings – is all of 30 years old. Their bosses wereall too willing to take foreign risks to make up for a disastrous year in the U.S. bond market. Few analysts emphasized political or economic risks. ““It’s not in anyone’s interest,’’ says a leading Latin stockpicker in New York. ““We’re in the business of selling equities to investors. Those things don’t bode well for equities.’’ So Wall Street stayed positive, leaning on sources like Banamex, Mexico’s largest bank, which devoted its monthly bulletin last December to proving that the peso was undervalued.
Zedillo knew better. His top advisers, all of whom held powerful posts under Salinas, began arguing for devaluation soon after the election. Salinas had ignored the festering problem, but Zedillo made it worse. Disorganization has been his hallmark. ““Why is Zedillo like a dog?’’ asks Mexico City’s latest joke. The answer: he pays attention only when he gets hit by a newspaper. He didn’t fill key cabinet posts until the last minute, and he shocked the markets by promising an economic program and then delaying. Devaluation was handled no better, leaving investors fuming that the government deliberately misled them. At Mexico’s request, President Bill Clinton quickly offered aid, but the initial effort was as hopeless as it was well-meaning: with the Mexicans unable to agree even on what exchange rate to aim for, nobody wanted to hold pesos.
Three months later, little has changed. The Finance Ministry continues its bitter rivalry with the supposedly independent Central Bank. Doubts that anyone is in charge have left the peso bouncing like a Ping-Pong ball. Zedillo’s only strategy is to tighten interest rates, cut spending and pray. ““Right now, stabilizing the peso is the only thing,’’ says a senior government official. ““Without it, nothing else falls into place.’’ As exporters take advantage of Mexico’s cheaper currency – February brought the country’s first trade surplus in four years – the dollars they bring in will help firm the peso. But first, bankers and investors expect weeks, or even months, of death-defying interest rates and a highly volatile currency.
Through the years of Mexico’s debt crisis in the 1980s and reform in the 1990s, the government retained an ability to control the pace of change. That is now gone. The poor will wait; despite the telegenic insurgency in Chiapas, the chance of large-scale political unrest seems small. The middle class is less patient. The money that poured into Mexico during the Salinas years created a new group of professionals and entrepreneurs. They are scared, they are angry and they hold the balance of power.
Manuel and Esperanza Arriaga would seem natural Zedillo supporters. They share his distrust of the Mexican oligarchy and his desire for a freer, more vibrant economy. But in three short months, their dream has come crashing down. Last year their water-pump factory in Puebla had 25 employees and sales of $4 million. Now Bombas Arriaga is on the verge of failure. The Arriagas have laid off 19 workers, put off their son’s college plans and are preparing to lose their new house. ““We went out on a limb because we believed the old, deceitful way of doing things here was past,’’ says Esperanza. Shellshocked, the family has embraced El Barzon, a middle-class group that has turned itself overnight into Mexico’s most powerful protest movement.
Zedillo has no easy economic answers for families like the Arriagas. As a substitute, he offers a prize that doesn’t cost money: political reform. Unlike Salinas, Zedillo has signaled that he’s prepared for the PRI to lose elections; this year, five state governorships are likely to pass into opposition hands. The arrests of Carlos Salinas’s brother, Raul Salinas, and of Carlos Salinas’s former deputy attorney general, Mario Ruiz Massieu, play well with the middle class. Raul is charged with ordering the September murder of Ruiz Massieu’s brother Jose Francisco, the PRI’s No. 2 leader. Mario – whom Carlos Salinas had appointed to investigate the murder – is now charged with covering up Raul’s involvement. The more Zedillo attacks corruption and the drug business, the better his chance of gaining middle-class support.
The sudden collapse of Mexico’s old regime is an opportunity as well as a tragedy. A population that has lost trust in the system is more open than ever to something new. ““In this country’s history, there have never been more propitious conditions for change,’’ writes Santiago Creel, head of the Federal Electoral Institute. That doesn’t mean an easy transformation. On the political front, extended turmoil – demonstrations, old-guard revolts, even more assassinations – is likely. Economically, Mexico has to adjust its expectations, too; the fantasy of being the next South Korea must give way to the reality that it will take years to develop a well-trained work force and an adequate pool of domestic savings. But while Washington seems convinced that Mexico has become a banana republic, the reality is far different. Mexico hasn’t been lost. Through crisis, it’s trying to find itself.
