| | |  Editorials | Issues | October 2008 
Mexico Burns a 10th of Its Reserves Defending Peso
 Robert Campbell & Michael O'Boyle - Reuters
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 |  | Auctions could open up the peso to attacks by speculators who will try to test the resolve of the central bank to see how far it will go.- Dustin Reid, currency strategist |  | | | |
Mexico City - Mexico made its most aggressive attempt yet to save the peso on Friday, selling $6.4 billion to prop up the currency, which suffered its worst weekly decline since the 1995 Tequila Crisis.
Global markets were rocked again on Friday by waves of panicked selling amid fears that the spiraling credit crunch could trigger a deep downturn in the global economy.
Faced with a massive sell-off of emerging market assets and demand for dollars in Mexico from local companies fearing currency losses, the country's central bank has auctioned more than one-tenth of its international reserves this week, raising questions over how long it can keep up the fight.
Finance Minister Agustin Carstens said volatility in the currency market had been "neutralized" by the auctions.
But despite the bank's rare intervention the peso still weakened 4.39 percent at the central bank's 1:30 p.m. (1830 GMT) reference point to 13.12 per dollar.
Government bonds saw their steepest price declines in more than two years while stocks pulled back from a 5 percent drop to close down 1.99 percent at a more than two-year low.
Although President Felipe Calderon this week tried to talk up the peso, saying the government had unprecedented international reserves and has paid down the bulk of its dollar-denominated debt, the currency has still lost around a quarter of its value since early August.
ENOUGH AMMUNITION?
The bank has sold $8.9 billion since Wednesday, over 10 percent of the $84 billion it reported holding as of Oct. 3.
Mexico last sold dollars in large amounts to support the peso during the Russian financial crisis of 1998.
"It will be difficult for the central bank to stem the tide," said Dustin Reid, currency strategist at ABN AMRO in Chicago.
However, Alberto Ramos, a senior economist at Goldman Sachs in New York, was more optimistic about the ability of the central bank to halt the peso's fall.
"They have plenty of ammunition to stabilize the market," he said.
Analysts warned that the continued fire sale of emerging market assets could overwhelm the bank's reserves if volatility continues at the current pace through the next month.
Reid said the auctions could open up the peso to attacks by speculators "who will try to test the resolve of the central bank to see how far it will go."
Investors rushed to sell stocks, partly on fears that more companies may suffer the fate of the country's third-largest supermarket operator Comercial Mexicana (Comerci) , which sought bankruptcy protection after it was unable to make debt payments because of the peso's fall. Comerci shares slumped 75.40 percent to 2.26 pesos.
Shares of Cemex , the world's No. 3 cement maker which disclosed multimillion dollar loses on derivative positions on Thursday, tumbled 15.87 percent to 8.85 pesos, weighing heavily on the IPC stock index, which slid nearly 405 points to 19,905.27, its lowest since June 2006.
Shares of Banorte , Mexico's fifth-biggest bank and the largest one not owned by a global financial firm, plunged 21.53 percent to 19.50 pesos despite assurances that it was insulated from the peso's recent losses.
Mexican peso-denominated government bonds, once a favorite of yield-hungry foreign investors, were also hammered. The yield on the benchmark 10-year peso bond jumped 41 basis points to 8.97 percent. There are 100 basis points in a percentage point.
(Editing by James Dalgleish) |
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