Mexico before the Crisis
- Mexican economy was fairly stable
- Inflation was low
- FDI was increasing
What caused the Crisis?
> NAFTA (North American Free Trade Agreement)
> Increase in risk premium
> Depletion of Federal Reserves
> Devaluation of the Mexican Peso
Devaluation of Mexican Peso
Depletion 0f Federal Reserve
Increase Risk Premium
NAFTA
- In order to combat the overvalued peso, Mexico tried to maintain a fixed exchange rate by selling assets, but this method did not work in Mexico's favor.
- December 20th, 1994 : Mexico devaluated the peso by 15%
- In order to prevent inflation in the United States, the Federal Reserve System concurrently increased interest rates in the U.S.
How did it effect the rest of the world?
- During this period, Chiapas began to rebel which caused the risk of Mexico to default to increase.
The Crisis
- Mexico decided to implement policy reforms to avoid messing up their commitments made under NAFTA which lead to the overvaluation of the peso.
- Once the peso became over valued the exchange rate became too high to maintain the balance of payments between the US and Mexico.
Mexican Peso Crisis Summary
- U.S. intervened by buying pesos in the open market
- U.S. lent Mexico $50 billion in loan guarantees, by the end of the crisis, U.S. made $500 million in profits
- The devaluation of the mexican peso, effected both Brazil and the Southern Cone because it caused their currencies to decline.
During The Crisis
Mexico’s GDP dropped by approximately 7.2%
Prices of imported goods rose, not just luxury goods but basic food stuffs, e.g., corn for tortillas.
During the Mexican Peso Crisis the country had to maintain the popularity of its new elected President, Ernesto Zedillo.
Increased Unemployment
Interest rates on state bonds rose to 50%
The Mexican government thought it was only temporary and made no substantial policy changes.
The devaluation drove up prices of imports and raised business costs dramatically
There was a 15% devaluation of the peso
The peso crashed under a floating regime from four pesos to the dollar to 7.2 to the dollar in the space of a week.
High interest rates drove smaller businesses bankrupt
Increased poverty
The Mexican Peso Crisis of 1994
The Tequila Crisis