G7 to hold emergency talks on Mexican crisis

The Group of Seven leading industrial nations will hold an emergency meeting next month to discuss the disruption of international financial markets caused by the Mexican crisis. Masayoshi Takemura, Japan's Finance Minister, said yesterday that th e meeting would be announced soon.

The news came as the announcement of an additional US rescue package for the crisis-torn Mexican financial system started to stabilise the US dollar and the peso. The US will provide up to $40bn in loan guarantees, on top of the $18bn credits previously agreed by the international banking community. With substantial International Monetary Fund and World Bank support under negotiation, total aid could reach $70bn.

US Senator Paul Simon, speaking after a briefing given to Congress by the Federal Reserve chairman, Alan Greenspan, said the new US loan programme could be worth up to $40bn, although less would be needed if the Mexican markets stabilised quickly and foreign investors stopped withdrawing funds. The credits could be secured on Mexican oil.

Guillermo Ortiz, Mexico's Finance Minister, said yesterday: "With this important package, in addition to the support that we already have, we're going to be able to ensure that the markets get back to functioning normally."

The dollar had a mixed day, but Mexico's currency rose 38 centavos to 5.27 pesos to the dollar. Mexico's stock market rebounded, rising 2 per cent.

Steve Barrow, currency analyst at Chemical Bank, said dealings in the currency markets had been driven by the banks. "Investors are waiting to see whether anything has changed materially or whether the currency market is just going through a period of volatility." He said there had been some profit-taking, helping the dollar after a difficult week.

Analysts received news of the US rescue package favourably. Nigel Rendell, emerging markets strategist at James Capel, said: "There will be more ripples from Mexico, but we have probably seen the worst of the panic."

Tanya Azarchs, a financial analyst at Standard & Poor's credit rating agency in New York, said: "We are not expecting a re-run of the 1982 crisis." That was the year Mexico defaulted on its debt to international banks.

Mexico's shock devaluation on 20 December led to massive outflows of foreign capital. Well over $1bn has left the country, creating a liquidity crunch.

The country has to satisfy international investors that it can meet all these short-term obligations, including tesobonos, the dollar-linked government securities. Short-term debts amount to at least $28.4bn and, according to some estimates, as much as $62bn in the next year. The concerted international response to the crisis seems at last to be helping on this front. A second requirement is setting the economy back on course.

The need to devalue came about because of a record current account deficit of nearly $30bn in 1994. Strong growth in spending had led to a surge in imports. Although the peso's 35 per cent fall in value will help cut the trade gap by making imports dearer and exports cheaper, it could lead to rapid inflation and will cut growth this year.

In the emergency economic plan announced on 3 January, President Ernesto Zedillo predicted inflation of 19 per cent and growth of 1.5 per cent, along with a halved current account deficit. This is seen as possible but optimistic. According to Baring Securities, in the worst case output could fall 1.5 per cent and inflation reach 45 per cent. The success of the plan depends on a wage restraint agreement with the unions holding.

The inevitable economic slowdown will reduce corporate earnings. The US and IMF will urge the government to extend privatisation and speed up deregulation of the economy to improve investor sentiment. It has taken the first steps along the path of liberalisation by drafting a bill allowing full foreign ownership of Mexican banks.

The World Bank, expected to announce its own support for Mexico within the next few weeks, has said the economy is "fundamentally sound". Michael Bruno, chief economist, said: "There comes a point where things stabilise, and hopefully this is already happening."