Mexico Sells Record $6.4 Billion in Bid to Stem Peso's Rout

By Michael J. Moore and Jens Erik Gould

Oct. 10 (Bloomberg) -- Mexico's central bank sold a record $6.4 billion in the currency market today, stepping up its bid to quell a rout in the peso that threatens to bankrupt companies and ignite inflation in Latin America's second-biggest economy.

Banco de Mexico has now sold $8.9 billion in three days, tapping into a near-record $84 billion of foreign reserves, after the peso plummeted to a record low. The peso gained as much as 4.6 percent after today's intervention, reversing an earlier tumble of as much as 6.1 percent. It has plunged 16.4 percent this month as investors sought the safety of dollars amid the worst financial crisis since the Great Depression.

``These are very extreme conditions,'' said Neil Dougall, head of emerging-market research for Dresdner Kleinwort Group in London. Policy makers ``needed to demonstrate very quickly that foreign exchange was available.''

Central bank Governor Guillermo Ortiz and Finance Minister Agustin Carstens are pumping dollars into the market as part of an effort to prevent the global crisis from eroding the finances of local companies. Controladora Comercial Mexicana SAB, the owner of supermarkets and Costco stores in Mexico, filed for bankruptcy reorganization yesterday after taking losses on currency derivatives.

Mexico's Bolsa stock index has lost 21 percent over the past seven days, mirroring the decline in the S&P 500 Index over that time, in part on concern the peso's tumble has saddled other companies with losses. The yield on Mexico's benchmark 10 percent peso bonds due in 2024 jumped 71 basis points, or 0.71 percentage point, this week to 9.11 percent.

1994 Devaluation

The $6.4 billion that Banco de Mexico sold today is the most in a single day, according to estimates by Gabriel Casillas, an economist with Banco UBS Pactual in Mexico City.

Central bankers sold $3 billion in a first auction, $400 million in a second sale and $3 billion in a third auction. They began selling dollars on Oct. 8 after the peso sank as much as 13.8 percent, its biggest intraday decline since the government abandoned a currency peg in 1994. The bank said in a statement late in the day that it ``will take any necessary additional measures to reestablish the normal operation'' of the market.

The peso was up 1 percent to 13.0930 per dollar at 6:15 p.m. New York time today, halting seven straight days of losses. It is down 25 percent from a six-year high reached on Aug. 4.

The global crisis has caused ``panicking in Mexico,'' said Bertrand Delgado, a Latin America economist with New York-based IDEAglobal Inc. ``The peso is just falling too fast.''

`Tequila Crisis'

Mexico was forced to abandon its peg in December 1994 after running low on foreign reserves, leading to a six-week, 45 percent plunge in the peso that became know as the ``Tequila Crisis.''

Reserves have since rebounded, almost tripling this decade amid a six-year rally in oil, the country's biggest export. They still ``aren't high enough to sustain'' the amount of dollars the central bank is selling, said Win Thin, a senior currency analyst with Brown Brothers Harriman & Co. in New York.

``Even during the Tequila Crisis, they weren't under this much pressure,'' Thin said. He said he doesn't expect Ortiz to raise interest rates to try to keep money in the country. ``They're running out of options.''

Brazil stands a better chance to stem its currency's plunge because it has more reserves, a record $208 billion, to draw on, Thin said. Brazilian central bankers have also sold dollars for three straight days. The real fell 1.3 percent today to 2.3130 per dollar. It's down 33 percent from a nine-year high reached on Aug. 1.

`Massive Unwinding'

Higher-yielding currencies throughout emerging markets have been ravaged over the past month as the global credit crisis has led investors to pull out of carry trades. In the carry trade, investors fund themselves with low-cost loans in countries such as Japan and invest in countries with higher interest rates such as Mexico and Brazil. Mexico's benchmark rate is 8.25 percent while Brazil's is 13.75 percent.

The carry trade, along with the rally in commodity prices, had fueled advances in the peso, real and other emerging-market currencies over the past five years.

``There is massive unwinding in the markets and that's putting severe pressure on currencies,'' Dresdner's Dougall said. ``Emerging markets have all been feeling this squeeze.''

Mexico is bracing for an economic slowdown as the financial crisis crimps growth in the U.S., the buyer of 80 percent of its exports. President Felipe Calderon sent this week a revised 2009 budget proposal to congress that lowered the growth forecast to 1.8 percent from 3 percent and cut the oil price estimate to $75 a barrel from $80.30. Oil has sunk 47 percent to $77.99 a barrel in New York from a record high of $147.27 reached on July 11.

`Credit Crunch'

Calderon also proposed a stimulus package worth 1 percent of gross domestic product that includes spending on energy and infrastructure to help offset the impact of the crisis.

Mexico's credit markets may tighten, adding to the economic slump, as companies that can't borrow in the U.S. seek funding in the local market, Deputy Central Bank Governor Guillermo Guemez Garcia said yesterday.

``They will have to go to the Mexican market, and that will cause some sort of credit crunch,'' Guemez said in an interview with Bloomberg Television in New York.

Mexican officials were surprised by the speed of the peso's plunge this week, said Delgado at IDEAglobal.

Calderon, 46, told bankers in New York in late September that he was confident Mexico would be able to ``mitigate'' the effects of the crisis that began in the U.S. mortgage market.

``People say that when the U.S. catches a cold, Mexico gets pneumonia,'' Calderon said at a lunch at the Waldorf-Astoria Hotel on Sept. 25. ``This is not the case today.''

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net Jens Erik Gould in Mexico City at jgould9@bloomberg.net