Mexico Rates Rise, Peso Plummets : Crisis: Zedillo defends his government against attacks on the strings attached to the $20-billion U.S. bailout package.

Interest rates soared to a seven-year high Wednesday and the peso continued its downward spiral as President Ernesto Zedillo defended his government against criticism for the stiff conditions attached to a $20-billion U.S. aid package.

In an indication that investor confidence in the Mexican economy was not restored by the financial rescue package signed a day earlier, the yield on Mexico’s bellwether 28-day Treasury bills rose 19 percentage points at the government’s weekly bond auction to a near-record 59%.

The Bolsa stock index, which fell 31 points on the auction news in early trading, rallied to close up 29.09 points, or 1.7%, at 1,708.26 after hitting a 19-month low Tuesday.

The peso, meanwhile, plummeted as low as six to the dollar before recovering slightly to close at 5.87, a drop of 26 centavos from Tuesday’s close.

Traders had expected interest rate increases at Wednesday’s auction of treasury bills, known as cetes, after the Mexican government agreed to higher rates and a tighter rein on the money supply as conditions of the credit package. But none expected them to soar that high.

In fact, some U.S. analysts had hoped that Mexico’s crisis would be eased at least somewhat by comments Wednesday from Federal Reserve Board Chairman Alan Greenspan, who gave his strongest hint to date that the U.S. central bank may be finished raising interest rates.

In theory, stable or lower U.S. yields would allow Mexican yields to also stabilize or decline.

But the yield on 91-day Mexican cetes rose 16.01 percentage points Wednesday from a week ago, to 57%, while 182-day yields rose 10.99 percentage points to 49%. The yield on one-year cetes also rose 10.99 percentage points to 46.98%.

Attracting largely short-term, highly speculative investment, Mexico’s central bank managed to sell all the paper it offered. But the new yields will make corporate borrowing almost impossible, inhibit production, fuel unemployment and generally contribute to an almost-certain deep recession ahead.

Zedillo, in a speech to college administrators, conceded that the ultimate solution to the crisis must come from within Mexico, not from U.S. and European lenders.

“The signing of the accord in no way will relax our own efforts,” Zedillo said in his first public comments on the aid package since Tuesday’s signing ceremony in Washington.

Appealing to all Mexicans to redouble their efforts to expand productivity and create jobs, he added, “Today, more than ever, Mexicans know that our discipline, our work, our strength, our savings and our perseverance will be the best support in overcoming the present crisis and making the economy grow.”

But his call on businesses to increase productivity and create jobs is likely to fall on deaf ears. Business owners were talking not about expansion and growth, but survival.

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“There is no kind of business that is sustainable with 60% interest rates,” said Federico Pinero, general director of Beneficios Cafeteros de Exportacion, one of the oldest exporters in the coffee-producing state of Veracruz.

Because his business generates foreign exchange, Pinero said, he hopes to be able to continue some borrowing in dollars, but other Mexican entrepreneurs are not as fortunate.

Zedillo’s pledge later in the day to continue large-scale government development projects in the countryside, despite his government’s agreement to massive cutbacks in public spending in exchange for the loan, met with similar skepticism.

“Rural development demands a deep transformation of the countryside, and in this challenge I am sure that all Mexicans can count on you agronomists,” the president told a gathering at his official residence. “The Mexican countryside needs your technical capacity, the Mexican countryside needs your knowledge, the Mexican countryside needs your dedication to service and to the land.”

However, Pinero pointed out that transformation of the countryside also requires credit. “No one has enough capital to support a change of crops alone,” he said.

While business interests criticized Zedillo for the tight money conditions in the loan package that sent interest rates skyrocketing, leftists attacked him for conditions that guaranteed payment by putting up oil exports as collateral.

“The agreements signed yesterday are unacceptable, useless and an error,” Saul Escobar, federal deputy for the Democratic Revolutionary Party, said during Wednesday’s congressional debate on the package. “In the first place, they are unacceptable because they effectively use our oil as a guarantee.”

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Zedillo defended the harsh strings attached to the loans as “naturally strict, financially, but they contain no type of political policy conditions.”

“They are wrong, those who say that in exchange for the financial assistance Mexico has compromised its economic policy to authorities of other nations,” the president said.

The 43-year-old Yale-educated economist called the loans “a very important step” in an overall strategy to restructure the nation’s debt.

“We have taken necessary steps, indispensable steps, to confront the economic emergency,” Zedillo said. “It is the matter of a strategy to avoid a major financial disaster that would cause massive unemployment and would gravely hurt the development and opportunities of an entire generation of Mexicans. It is the question of a viable strategy that bears the least social costs.”

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Staff writer Tom Petruno in Los Angeles contributed to this report.

* NO MORE HIKES?

Fed chief Greenspan hints of an end to interest rate increases. A1

* MARKETS RALLY

U.S. bond yields plummet following Greenspan remarks. D3