MEXICO CITY -- Mexico's economic crisis deepened, sending the peso plummeting 20 percent further yesterday, after the government adopted an emergency plan late Wednesday night to allow the currency to trade freely against the U.S. dollar.
The decision to float the peso was a desperate attempt by the government of President Ernesto Zedillo Ponce de Leon, who took office only three weeks ago, to calm the financial markets after several days of intense speculation and plunging indexes.
The peso was previously controlled by a trading band that let it fall not much lower than 3.46 pesos to the dollar before the government intervened.
This floor was dropped Tuesday to just short of 4 pesos to the dollar. But the resulting confusion, which battered Mexican stocks, led the government on Wednesday night to give up and allow the peso to trade freely. Yesterday, the peso closed at 4.80 to the dollar -- down almost 30 percent for the week.
The casualties of the devaluation included U.S. banks, mutual funds and private investors who hold high-interest Mexican treasury notes that are now worth substantially less as a result of the cheaper peso.
Companies that have invested heavily in Mexico reacted with alarm to the peso's plunge. Manufacturers that export to Mexico face losses because those goods potentially became nearly 40 percent more expensive this week.
Several companies said the sudden devaluation has sorely tested their confidence in the Mexican government, which had long pledged to defend the currency. Now, some fear that the economy is headed for a period of wage and price inflation, and even the risk of a new recession.
Critics of the North American Free Trade Agreement said the peso's steep drop, by making Mexican exports to the United States much more competitive with U.S. goods, would make the United States regret its agreement to freer trade.
Stockholders of Mexican companies were also hurt when values of their shares plunged on the Mexican stock exchange. The depreciation was hardest on companies that are loaded down with debt that must be paid back in dollars.
The faltering of what had been considered Mexico's textbook economic restructuring, a model copied by other Latin American countries, amplified investor disillusion over the resolve and abilities of Mr. Zedillo's economic team and its policies.
The Mexican stock market yesterday had one of the year's most erratic trading days, yet made up some of the heavy losses of the last few days with an increase of 4.7 percent at the close. But in New York, Mexican issues traded on the New York Stock Exchange plunged nearly 20 percent.
Many U.S. investors said they felt misled by Mr. Zedillo's administration, which had tied its currency problems to reports of a renewed offensive by Indian rebels in Chiapas, especially after it became known that the rebels had not made any substantial gains. The sudden devaluation also angered investors because Finance Minister Jaime Serra Puche and other officials had said only last week that the government saw no need to devalue the peso. The currency changes mean that U.S. products exported to Mexico overnight have become more expensive, although the government has ordered that domestic prices be held steady for at least 60 days. But Mexican exports to the United States are expected to enjoy a big boost because the sudden decline in the peso makes them cheaper.