Peso Panic

After six years of economic crisis, Mexico's prospects finally seemed to brighten this year. The country's stock market became the world's fastest- rising exchange, as share prices climbed more than 649% during the first nine months of 1987. The government's foreign currency reserves swelled by 150% to a comfortable $17 billion, the highest level of any Latin American debtor country, and a surge of exports helped the Mexicans rack up a $6.6 billion trade surplus.

Now, just as suddenly as the financial picture turned sunny, it has clouded over again. Last week the Mexican peso began to gyrate wildly. By Friday its value had settled to about 2,700 pesos to a dollar, down 37% for the week. Supplies of dollars quickly ran out as Mexican citizens lined up at banks to change their pesos. At week's end Mexico's Finance Minister, Gustavo Petricioli, appealed to the public on national television to remain calm.

What led to the turmoil? The trouble began in earnest with the Oct. 19 crash on Wall Street, which knocked the wind out of the Mexican stock market. Since Black Monday, the total value of shares on the exchange has plunged by more than 70%, from $38 billion to $11 billion. Says Salvador Kalifa, an economic consultant from the northern city of Monterrey: "Gossip and rumors take precedence over all else. All people want is to get rid of their portfolios." The market collapse made Mexicans nervous about the peso.

For several weeks the government propped up its currency by using its reserves of dollars to buy pesos. By last week, however, Mexican officials began to fear that they would come close to running out of greenbacks. If that happened, Mexico would be unable to pay interest on its foreign loans and obtain new credit from banks. Result: the government abruptly abandoned its support of the peso, sending the currency into a free fall.

Officials defended the strategy, saying they had acted decisively. But it is a gamble that could destroy what is left of public confidence in the Mexican economy. Even American retailers along the border who rely on Mexican patronage will probably experience reduced sales. Moreover, the falling peso will surely fan the country's raging inflation. Prices are now rising at an annual rate of 141%, the highest level in Mexican history.