Tastes like tequila? Mexico fears a new crisis

MEXICO CITY - Ten years after the so-called Tequila Crisis ravaged the economy, a new rash of violence and political intrigue has some spooked Mexicans checking their calendars to make sure it's not 1994 when the country neared collapse.

A former president's brother was found murdered in his car this month, a plastic bag over his head. Two policemen were burned to death by an angry mob. And tensions over a tight three-way presidential race have led to near gridlock between the president and Congress.

The political tensions bring back memories of the lead-up to the financial crisis in 1994, when investors unsettled by a Zapatista rebel uprising and the assassination of a leading presidential candidate withdrew billions of dollars a day from Mexico.

With low foreign reserves, an overvalued currency and a gaping trade gap, the central bank was forced to effectively devalue the peso on December 20 of that year, instantly bankrupting thousands of families in a dramatic economic collapse.

Shock waves from the 1994 crisis rocked emerging markets from Argentina to Singapore.

The US government had to step in with a US$52 billion ($74.25 billion) bailout to save its southern neighbour from total collapse.

While everyone agrees Mexico's politics and economy are more stable than they were a decade ago, that hasn't silenced the alarm bells for either Mexicans or Wall Street investors.

"The 'Tequila' taught us that Mexican politicians are capable of ruining anything," said Roberto Gonzalez, an insurance salesman, as he deposited a cheque at a bank.

"I'm not scared yet, but I'm watching things very carefully."

Much has changed since then.

The Zapatista movement fizzled out, and its masked leader Subcomandante Marcos now spends his days writing a mystery novel.

Billions of dollars sent home every year by Mexicans living in the United States underpin the economy, which is rated "investment grade" by credit agencies and has benefited from a decade-long free trade deal with the United States and Canada.

"I don't rule out some market volatility in coming months, but I would never think that it could translate into the kind of instability that we saw 10 years ago," said Javier Duclaud, who worked on the central bank's foreign exchange desk during 1994 and is now its director of operations.

However, several economists from major investment banks such as Morgan Stanley, UBS and Credit Suisse First Boston have made trips to Mexico in the last month to gauge just how hot the country's politics are getting ahead of the 2006 presidential elections.

"This is promising to be a classic transition -- full of unpleasant surprises," Walter Molano, an economist at the BCP securities group, said in a recent report.

"Mexico has always resorted to violence during such episodes. Let's hope some of the newcomers to the Mexican debt market don't get too spooked."

The presence of a leftist hopeful, Mexico City mayor Andres Manuel Lopez Obrador, at the head of opinion polls for 2006 worries foreign investors.

They fear the mayor, President Vicente Fox's main political rival, would take Mexico the way of Venezuela under combative President Hugo Chavez, whose economic record is poor.

Fox, locked in a bitter fight with Congress over next year's budget, recently reminded Mexicans that "we must remember 1994".

"It is not convenient that we totally forget (those days), because then we would lose our appreciation for economic, political and social stability," he said.

Fox has failed to push energy, labour and fiscal reforms through Congress but under him Mexico has remained steady while other Latin American countries like Argentina and Brazil have gone through political or economic turmoil in recent years.

- REUTERS