Source: San Jose Mercury News (CA) Contact: http://www.sjmercury.com/ Pubdate: Wed, 2 Sep 1998 Author: Ricardo Sandoval, Mercury News Mexico Bureau WE CAN SIDESTEP CRISIS, ZEDILLO TELLS MEXICO MEXICO CITY -- As new economic woes grip Mexico, President Ernesto Zedillo Ponce de Leon tried Tuesday night to reassure anxious Mexicans that their country has the tools to avoid disaster -- the same tools his government used three years ago to emerge from financial catastrophe. ``Results demonstrate that Mexico has dealt satisfactorily with the very difficult situation we have faced in 1998,'' Zedillo said in his annual State of the Union speech, his fourth since taking office. ``Thanks to our monetary and fiscal discipline . . . the economy's growth has been maintained to the greatest extent possible.'' Yet Zedillo's nationally televised speech was marked not only by what he said about the country's economic strength and how he'll solve a banking scandal, but by what he left out. There were no specifics on how Mexico will deflect a worldwide economic storm that in the past year has stripped the peso of nearly 30 percent of its value. ``The strategy that Mexico used to overcome the 1995 economic emergency fully achieved its objectives,'' Zedillo said during his 93-minute speech, which received a lukewarm response from a Congress dominated by opposition parties. Zedillo credited government austerity programs and tight fiscal policies with cutting the $30 billion deficit by half and by slashing inflation from 52 percent in 1995 to 15 percent this year. But unlike his previous two reports, which he delivered during a robust recovery, Zedillo spoke amid widespread fear over Mexico's future. In recent days Mexicans have told pollsters they fear another crisis like the 1995 peso meltdown that halved the currency's value and wiped out millions of jobs. After weeks of debate over how to handle a proposed $65 billion banking system bailout, Zedillo offered reassurance that his administration was doing all it could to keep the banking system afloat, to beef up anti-fraud laws, and to target bank managers and business people who have defaulted on huge loans -- money taxpayers will probably have to pay. Bad loans, fraud and diversions of bank funds to ruling-party candidates crippled a banking system already hurt by loan defaults spawned by the peso crisis, which was precipitated when Zedillo devalued the currency just days after taking office in December 1993. In 1995, Zedillo was the author of a plan to rescue banks. The government bought up bad loans with long-term bonds that Zedillo now wants to convert to public debt -- allowing banks to cash in the bonds and clean their books more quickly. Yet Zedillo's bailout plan has fallen flat with most Mexicans, who have told pollsters that Zedillo and his ruling Institutional Revolutionary Party have mismanaged the economy. ``The president must realize that the pattern of the last 15 years can't continue,'' said Democratic Revolutionary Party Sen. Rosa Albina Garavito, in a counterpoint speech to the legislature in Mexico City's cavernous Chamber of Deputies. The conservative National Action Party -- the PAN -- was just as harsh: With all of the nation's economic problems, ``there is a serious deficit of credibility . . . and the longer the administration waits to recognize and attack the problems, the more damage the country will suffer,'' said Sen. Gabriel Jimenez Remus, delivering his party's reply. The only point on which all parties agreed was that democracy in Mexico is now firmly established with clean, closely fought local and state elections after last year's landmark vote that ushered in an independent legislature and an opposition-party mayor in Mexico City. Although he highlighted what he said was progress in infrastructure, schooling and poverty, Zedillo admitted that government inaction against rampant crime is compounding national uncertainty. The country remains bedeviled by spiraling crime. ``Where public safety is concerned, those of us in . . . government . . . have failed our citizens,'' Zedillo said. ``We are living the consequences of permissive laws and inadequate reforms; of years of negligence, lack of foresight and corruption in the institutions charged with law enforcement.'' Zedillo proposed a $400 million effort to beef up federal and state police with new equipment and training, and promised to overhaul a court system that Mexicans feel protects criminals through corruption and light penalties. Like last year, Zedillo did not address the simmering conflict in the southern states of Chiapas, Oaxaca, and Guerrero, where Zapatista and People's Revolutionary Army rebels have recently clashed with police and the Mexican army. 1997 - 1998 Mercury Center. - --- Checked-by: Mike Gogulski