Peso strengthens after $20bn bailout

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The United States and Mexico yesterday signed a $20bn (£13bn) rescue package for the Mexican economy, the first stage of a $50bn international bailout. The peso strengthened in anticipation of the signing, trading at around 5.40 pesos to the dollar compared with Monday's close of 5.55.

But the political cost of reported tough US conditions could counterbalance the deal's financial importance for the beleaguered Mexican President, Ernesto Zedillo.

After several days of intensive talks in Washington, Robert Rubin, the US Treasury Secretary and Guillermo Ortiz, the Mexican inance Minister, signed four agreements which, said Mr Rubin, were aimed at "restoring to health Mexico's economy in the long term".

Mr Ortiz insisted that Washington had imposed no political conditions. But there was widespread criticism in Mexico of the fact that the country will have to put up as security against default on debt repayments its vital oil revenue, about $7bn a year and formally specified as national patrimony under the constitution.

In a speech before the signing at the US Treasury, Mr Rubin said there were four separate accords: a framework agreement, a medium-term stability agreement, a security guarantees agreement and an oil proceeds facility accord.

"Mexico had a problem and we responded to that problem," Mr Rubin said. "The ultimate success of this programme depends on Mexico." He said an initial $3bn would be made available immediately and a total of $10bn by the end of June. The remaining $10bn would be released after 1 July provided Mexico has adhered to the terms of the accords.

However Mexico's current climate, with Mr Zedillo battered by criticism of his handling of the Indian peasant uprising in the state of Chiapas, means anything affecting the economy - particularly a predicted recession, business closures, job losses and a further fall in the standard of living - will have political implications. The Banco de Mexico raised key interest rates on Monday from 40 per cent to just under 50 per cent, widely seen as demonstrating to the US that Mexico was serious about imposing a tighter monetary policy .

Anticipating the signing, the leading Mexican daily El inanciero yesterday carried the splash headline "Tough Conditions for US Loan. Radical Stance by Robert Rubin."

On Monday, anti-government protesters threw tomatoes at the US embassy in Mexico City and the chairman of the left-wing opposition Party of the Democratic Revolution, Senator Porfirio Munoz Ledo, spoke of the danger of a military coup because of Mr Zedillo's perceived weakness.

Demonstrators calling for "peace in Chiapas" sang and danced around Mexico City's Angel of Independence monument on Monday night, expressing support for the Indian peasant guerrillas and their white leader, Subcomandante Marcos. They criticised the reported advance of Mexican troops towards an area where hundreds of guerrillas are said to be hiding in the jungle along with several thousand starving civilian sympathisers afraid of returning to their homes .

Oil revenues are one of the few issues which can still unite Mexicans of all political persuasions against foreign interference. In one of the most popular moves in Mexico's post-revolutionary history, President Lazaro Cardenas kicked out foreign oil companies and nationalised the industry in 1938.