By Latin American—or indeed any—standards, the Mexican peso has been a remarkably stable currency. Since 1954 its exchange rate has not budged from 12.5 to the dollar. Mexicans were understandably astonished, therefore, when Treasury Minister Mario Ramon Beteta suddenly appeared on their TV screens last week to announce a change. From now on, he said, the peso would float freely—in other words, its value would be determined by supply and demand.
Though Beteta was careful to avoid saying so, the move amounts to a massive devaluation. By week's end the exchange rate sank below 20 pesos to the dollar. That might lure many more American tourists to sample the delights of Acapulco or poke around the Aztec ruins near Mexico City, since their dollars will buy more in Mexico. But it will also hurt the many other Americans who have poured investment money into Mexico, seeking interest rates of 12% or more.
Bankers and businessmen were not overly surprised by the news. Rumors of a peso devaluation had been in the air for months, fueled by a huge Mexican trade deficit ($3.7 billion in 1975), stubborn 15%-a-year inflation and high foreign debt ($13 billion). A devaluation was also sought by tourist operators, whose business declined 4% in 1975, owing largely to price increases that had made once cheap Mexico City as costly for Americans as many European cities. Said President Luis Echeverría Alvarez: "In the end, there will be more jobs, more production, more exports and more tourism."
Perhaps, but the peso's sharp devaluation could also do harm in Mexico. Prices of the $6.6 billion worth of consumer and capital goods that Mexico imports will rise sharply in peso terms. In the wake of Beteta's announcement, many sales clerks worked until midnight changing the price tags on merchandise. At the Puerta de Liverpool department store, for example, refrigerators went up 20% overnight, color TV sets more than 30%. To ease the burden, Echeverría has already promised raises for workers, civil servants and pensioners—a generous but inflationary move.
Apart from tourists, the Americans most affected will be the investors who have poured billions into peso-dominated bonds and savings accounts. At the old exchange rate, for example, $2,000 would have bought a 25,000-peso bond that at 12% would pay interest equal to $240 a year. At 20 pesos to the dollar, the bondholder's principal has shrunk to $1,250, and his interest to $150 a year.