Wall Street hails Zedillo's role in turning Mexico around

NEW YORK (Reuters) -- His was the face that Wall Street put on Mexico's ugly economic crisis of 1995 -- the "accidental president" who took office as the peso plummeted.

But any congratulations President Ernesto Zedillo offers himself in his last State of the Nation speech Friday evening will likely be humble compared to the praise lavished on him by the U.S. financial community for his role in turning the country around.

"He will go in the history books as the man who fought the economic fire that was consuming Mexico in late 1994, early 1995, and who separated the state from the ruling PRI political party by encouraging competitive elections," said Arturo Porzecanski, head of emerging markets economic and debt strategy at ABN-AMRO Inc. in New York.

An economist and technocrat with rough political skills, Zedillo became the PRI (Institutional Revolutionary Party) candidate following the 1994 assassination of front-runner Luis Donaldo Colosio.

The national trauma caused by the murder triggered a run on the peso that mushroomed into a currency crisis in December, the same month that Zedillo was inaugurated.

"He was called the accidental president, referring to the fact that he was not the original candidate of the PRI. In the early months of 1995 there was open talk in Mexico about him either having to resign or being toppled," Porzecanski said.

"This is where he started, with rock bottom popularity. Everything that could have gone wrong, did," Porzecanski added.

Zedillo went to work.

He secured an unprecedented bailout package from the United States, built on structural reforms initiated by the previous administration, strengthened the country's macroeconomic fundamentals and allowed political reforms that set the stage for Vicente Fox and his National Action Party (PAN) to break the PRI's 71-year monopoly on power.

Fox won the July presidential election and takes office in December.

Mexico on Thursday said it made a $3.0 billion prepayment to the International Monetary Fund, clearing its debts with the fund and thus bringing the administration full circle from the crisis of 1994-95.

"It's poetic justice," said Jim Barrineau, a vice president in emerging markets research at Alliance Capital Management.

"This is Zedillo telling the market, 'Look, we started out having to come to the U.S. and the IMF for all this help in the midst of a crisis, and now we are wiping the slate clean."'

Boris Segura, chief emerging markets economist at Atlantic Asset Management, said Zedillo has personally charted Mexico's course even though Jose Angel Gurria has had the title of finance minister for the last few years.

"He was the minister of finance for the last three years of his administration," Segura said. "Gurria is a very good salesman, but in terms of developing and implementing the policies, it was Zedillo."

Standard & Poor's has said the country may win its second major credit rating upgrade of the year if the president-elect chooses a solid cabinet and the new Congress is willing to pass economic reforms.

Moody's Investors Service lifted its rating of Mexican debt to investment-grade status in March, opening the country to a class of investors who can buy only high-grade paper. An S&P upgrade would confirm that Mexico is an increasingly safe bet as it integrates economically with the rest of North America.

"We will pay attention to the State of the Nation speech but the actions of the incoming administration will be the driving factor in terms of the rating," said Bruno Boccara, S&P's director of Latin American sovereign ratings.

"Nothing will really alter our thinking until we see the budget, the new cabinet and have more of an idea of where they're going to go," he told Reuters.

S&P rates Mexico BB-Plus with a positive outlook. The next stop up on the S&P scale would be the investment grade rating of BBB-minus.

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