Mexican markets suffered sharp reverses yesterday, as investors responded to warnings that Thursday's impeachment trial of Mexico City's left-wing mayor could lead to increased political volatility.

The yield on the benchmark 20-year peso-denominated government bond, which has seen heavy buying from foreign investors over the past few months, has gone from 10.3 to 11.2 per cent since the impeachment trial of the mayor, Andrés Manuel López Obrador, was first announced late on Friday.

In the stock market, the benchmark IPC index fell 2.3 per cent, and has now fallen more than 11 per cent in the past month. The peso also slipped, falling from 11.18 to 11.27 to the dollar. It had hit a rate of 10.98 a month ago.

President Vicente Fox tried to calm the markets. Speaking to a conference organised by Monterrey Tech university, he said recent macroeconomic indicators showed the country was on “the right track”. “This is the moment to invest, to invest to increase productive work and economic growth,” he said.

Several large investment banks warned that political risk created by the impeachment process could create volatility.

Mr López Obrador, who has threatened a campaign of civil disobedience if he is removed from his post and barred from running for office, currently has a comfortable lead in all polls for next year's presidential election. Polls suggest more than four in five Mexicans oppose the impeachment process.

Gray Newman, Latin American economist for Morgan Stanley in New York, said: “If the Mexican electorate begins to feel that the move to strip the front-runner of his immunity and force him from office is being motivated by a desire to limit the choices presented in the presidential race, I am afraid that the political turmoil can turn nasty.”

He said he was convinced Mexico could weather the political turbulence with its fiscal and monetary stability intact, but added: “I am afraid we are about to discover that the economy and Mexico's markets are not immune from a nasty bout of investor nervousness.”

Damian Fraser, Latin American equity strategist for UBS in Mexico City, also thought the risk of contagion to the economy was limited, but said: “The wide spectrum of [strong] opinions on the impeachment suggests rising political uncertainty and risk.”

Geoffrey Dennis, Latin American equity strategist at Citigroup Smith Barney, warned that “all the bad news is not yet priced in”. However, he said impeachment might be a “long-term positive” if Mr López Obrador were blocked from running for the presidency.

Mr López Obrador is hoping to bring a million protesters to the centre of Mexico City ahead of tomorrow's impeachment vote. It is not clear how much national mourning for the Pope will diminish tension.

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