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Mexico Raises Interest Rates; Stocks Fall; Recession Feared

By Mark Fineman
Los Angeles Times
MEXICO CITY

The Central Bank on Monday unexpectedly boosted interest rates to almost 50 percent, driving down the Mexican stock market and confirming fears that a $20-billion bailout the government is about to sign with the United States is tied to restrictions that will fuel a recession in Mexico this year and compound President Ernesto Zedillo's political problems.

The bank's official interest rates were almost 10 percent higher than those set last week at the weekly treasury-bill auction.

But officials defended this drastic measure as one in a series of steps to strengthen Mexico's currency, which gained in value against the dollar after the government applied the bitter medicine.

The peso, which has lost about 40 percent of its value in two months, closed Monday at 5.59 to the dollar, after trading at more than 6.0 at the peak of last week's slide.

But the Mexican stock market, in turn, took a nose dive. Amid fears that soaring credit costs will push more Mexican companies into default and bankruptcy and further reduce lagging consumer demand, Mexico's stock market, the Bolsa, fell 64 points, or 3.51 percent, closing at 1,766, a 19-month low.

Zedillo's economic advisers said they expected sharply higher interest rates to help lure back billions of dollars in foreign investment that fled Mexico's political uncertainty and a looming guerrilla war in the southern state of Chiapas in the past two months. The massive capital-flight has triggered the nation's worst economic crisis in more than a decade.

Monday's drastic interest-rate increase - the central bank offered three-day treasury bills yielding 49.75 percent interest, up from 39 percent to 40 percent last week - appeared to be aimed as much at helping finalize negotiations on the U.S-Mexico credit package as it was meant to help stabilize the battered peso, most independent analysts concluded.

In Washington, negotiations continued through a fifth day Monday between Treasury Secretary Robert E. Rubin and Mexican Finance Minister Guillermo Ortiz on a proposal for the United States to provide Mexico with $20 billion in loans and loan guarantees.

U.S. Treasury officials refused to discuss the status of the talks. But White House Press Secretary Mike McCurry said officials "have been making progress toward finalizing the economic support package." A final agreement could be announced Tuesday.