Mexican crisis

The 1994 Mexican Peso Crisis

In the second half of the 20th century, Mexico was confronted with multiple economic crises. Today we focus on the crisis of 1994, It is also called the December mistake in Mexico, and its consequences are sometimes referred to by economists as the Tequila effect. where a strong devaluation of the peso led to both a currency and banking crisis. Next to explaining how the crisis evolved, we describe the economic context and triggers of the crisis.

What is the impact of the Mexican economic crisis?

The government of Ernesto Zedillo came to power in the last quarter of 1994 and quickly had to face the consequences of an untenable promise: parity with the dollar.

The country had been growing steadily for several years, attracting a lot of capital. On 20 December 1994, the Mexican central bank devalued the peso by 15% (ending parity with the dollar). To limit excessive capital flight, the bank also raised interest rates. Short-term interest rates reached 32% and the resulting increase in borrowing costs endangered economic stability.

The Mexican government allowed the peso to float freely again two days later, but instead of stabilising, the peso suffered another blow, depreciating by almost half its value in the following months.

 The Mexican peso lost two-thirds of its value against the dollar.

Former president Carlos Salinas will speak of "del error de diciembre». The country then entered a crisis, with a 7% drop in growth in 1995.

Following the announcement of the devaluation, the value of the peso rose from 3.4 to 7.2 to the dollar in one week.

Bill Clinton, President of the United States, Mexico's close economic neighbour, intervened to stop the crisis, and the United States, together with international organisations, lent Mexico US$50 billion a week after the crisis began, including US$18 billion via the IMF. (International Monetary Fund).

The crisis is spreading to other South American countries, which, in the eyes of investors, are similar to Mexico, and are becoming just as fragile and untrustworthy. Fleeing investment in these countries, abandoning their currencies in favour of the now attractive and above all safer dollar, they provoke a profound financial rejection of Argentina and Brazil

 It is precisely this domino effect in Latin America in 1995 that is called the 'tequila effect'. It is more complicated to analyse because it was a crisis of confidence that caused a significant crisis in the real economy of these countries, which had nothing to reproach themselves for, except for being a country close to Mexico in the Western collective imagination.  But the generalized mistrust of these countries was undoubtedly disproportionate, especially in view of the serious consequences for their real economies.

LES YEUX DU MONDE

WIKIPEDIA

INVESTOPEDIA

MANAGEMENT STUDY GUIDE

MAJOR-PREPA

FREDERIC DUMONT

Devalued

Capital flight

Parity

Interest rates

poverty

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