DON'T PANIC: HERE COMES BAILOUT BILL

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Experts say the country that defaulted on millions of dollars in loan payments in 1982 has greatly strengthened its economy since then. It has balanced its budget three years in a row; sold off costly state-owned companies like Telefonos de Mexico, the country's largest telephone firm; and locked into place an open-market policy by joining the North American Free Trade Agreement. And even though Mexico still lacks a large, consumer- oriented middle class, business activity grew a healthy 3.1% last year.

But President Ernesto Zedillo Ponce de Leon still must reform the policies that caused the latest crisis--specifically, Mexico's reliance on foreign capital. Much of those funds fled in December when the government, unable to prop up the overvalued peso any longer, let the currency float. Now Zedillo is taking the politically risky steps of slashing government spending and jacking up interest rates to slow the economy and wean it from its dependence on ``hot money''--foreign investments in securities that can easily be dumped. Says Allen Sinai, the chief economist for Lehman Bros.: ``Mexico must swallow a recession. If the government can hang in there and people can live through a year of austerity, the economy will be on its way. But it's going to be a real test of the country.''

The problem is that crisis-weary Mexicans are already staggering under the twin blows of layoffs and an inflation rate that could top 30% in 1995. Nissan and Volkswagen both plan more than 1,000 job cuts this month, while entertainment giant Televisa has dismissed 1,500 employees, or 6% of its work force, since December. ``Most people prefer to buy food rather than cigarettes,'' says Consuelo Docal de Rojas, who owns a struggling candy and tobacco shop in Mexico City and rents out apartments above the store. ``People can't scrape up cash to cover even necessities.'' At the same time, she adds, ``all my tenants are behind on their rent.''

Part of the trouble reflects Mexico's success in opening up its once locked-tight markets to foreign goods. Under NAFTA the country accelerated its consumption of imported products ranging from shampoo to computers that drove thousands of inefficient domestic firms out of business. Now many Mexican companies can't find local replacements for foreign suppliers, whose prices have jumped as much as 50% since Zedillo devalued the peso.

To make matters more painful, the dismantling of government subsidies that saved firms a decade ago leaves today's companies unshielded from harm. Termoplasticos Inyectados, a small electrical-parts company, had been gradually winning back customers after losing them to imports for several years. But the collapse of the peso drove up the price of raw materials and brought the company's business to a standstill. ``Everything has stopped,'' says manager Ricardo Villanueva. ``If you ask me what I'm going to do, the answer is I just don't know.''

Other companies that turned lean under the pressure of foreign competition are now poised to profit from a cheap peso that lowers the price of their exports. Min-Cer, a maker of wheel and drum components for tractor-trailers, plans to export 90% of its output this year. ``We are expecting a very steep drop in domestic demand, but we're working three shifts a day for exports,'' general director Carlos de la Garza says.