¡Qúe Lástima!¡Qúe Lástima!The Mexican Peso The Mexican Peso

CrisisCrisisof 1994 -1995of 1994 -1995by Two People With(Out) by Two People With(Out)

CashCash

The Beginnings of the The Beginnings of the CrisisCrisis

The Mexican Peso Crisis began in 1994.The Mexican Peso Crisis began in 1994. In happened, for the most part, because In happened, for the most part, because

of a short-term foreign exchange of a short-term foreign exchange problem that Mexico was having.problem that Mexico was having.

Shortly before the crisis, in 1993, North Shortly before the crisis, in 1993, North American approved NAFTA (North American approved NAFTA (North American Free Trade Agreement), American Free Trade Agreement), which became the world’s largest free which became the world’s largest free trade agreement and made a good deal trade agreement and made a good deal of future growth possible for Mexico.of future growth possible for Mexico.

1994: Starting Off with a 1994: Starting Off with a Bang, Literally!Bang, Literally!

On New Year’s Day in 1994, a radical activist On New Year’s Day in 1994, a radical activist launched a rebellion in Chiapas.launched a rebellion in Chiapas. He had been organizing this rebellion with his He had been organizing this rebellion with his

group members for many years.group members for many years. This foreshadowed much of what was to come for This foreshadowed much of what was to come for

Mexico in 1994.Mexico in 1994. A presidential election was scheduled for A presidential election was scheduled for

August 1994.August 1994. Because of much political unrest in Mexico, politics Because of much political unrest in Mexico, politics

took up most of the time during the campaigning, took up most of the time during the campaigning, without much time being used to talk about future without much time being used to talk about future economic policy.economic policy.

1994: Starting Off with a 1994: Starting Off with a Bang, Literally!Bang, Literally!

Miguel Salinas de Gotari, the president Miguel Salinas de Gotari, the president at the time, had selected Luis Donaldo at the time, had selected Luis Donaldo Colosio as the candidate of the Party of Colosio as the candidate of the Party of Institutional Revolution (PRI), the Institutional Revolution (PRI), the party that had ruled in Mexico for half party that had ruled in Mexico for half a century.a century. Colosio was assassinated in March of Colosio was assassinated in March of

1994.1994. Ernesto Zedillo was chosen as his Ernesto Zedillo was chosen as his

successor and was elected in August.successor and was elected in August.

More Political TroublesMore Political Troubles

In September, one of Zedillo’s cabinet In September, one of Zedillo’s cabinet members was assassinated.members was assassinated. This was seen by foreign investors as the This was seen by foreign investors as the

final straw.final straw. With so much political unrest and With so much political unrest and

instability, these investors no longer instability, these investors no longer trusted leaving their money in Mexico, trusted leaving their money in Mexico, and thus began pulling this money out.and thus began pulling this money out.

Mexico lost $1.5 billion in reserves in a Mexico lost $1.5 billion in reserves in a period of three days.period of three days.

Future DevaluationFuture Devaluation

The outgoing president did not want to devalue The outgoing president did not want to devalue the peso while he was still in office, so he left the peso while he was still in office, so he left this task for the new president to handle.this task for the new president to handle. By the time Zedillo took office, devaluation was By the time Zedillo took office, devaluation was

completely unavoidable.completely unavoidable. The fact that the peso remained overvalued for so The fact that the peso remained overvalued for so

long scared away foreign investors of Mexican long scared away foreign investors of Mexican products and encouraged Mexicans to buy foreign products and encouraged Mexicans to buy foreign products, a double-edged sword for the Mexican products, a double-edged sword for the Mexican economy.economy.

The imminent devaluation encouraged even more The imminent devaluation encouraged even more foreign investors to convert their pesos into dollar foreign investors to convert their pesos into dollar assets.assets.

Supporting Mexican Supporting Mexican CurrencyCurrency

Mexico was forced to support the Mexico was forced to support the value of the peso by using up its value of the peso by using up its foreign holdings to buy back pesos.foreign holdings to buy back pesos.

Thus, their foreign reserves were Thus, their foreign reserves were wasted on a currency that was wasted on a currency that was impossible to try to sustain.impossible to try to sustain.

Let’s look at some of Mexico’s Let’s look at some of Mexico’s numbers at this point:numbers at this point:

By the Numbers…By the Numbers…

Year

Balanceof

TradeCurrentAccount

DirectForeign

InvestmentPortfolio

Investment

GrossInternationalReserves

TotalExternalDebt

PublicSectorExternalDebt

InterestPayments

1989 0.4 -5.8 6.6 0.4 6.6 95.3 76.1 9.3

1990 -0.9 -7.5 10.2 3.4 10.2 104.3 77.8 9.2

1991 -7.3 -14.6 17.5 12.8 17.5 116.5 80 9.2

1992 -15.9 -24.4 18.6 18 18.6 117.5 75.8 9.6

1993 -13.5 -23.4 24.5 28.9 24.5 131.7 78.7 10.9

1994 -18.5 -29.7 6.1 8.2 6.1 142.2 85.4 11.8

1995 7.1 -1.6 15.7 -9.7 15.7 169.9 100.9 13.6

1996 6.5 -2.3 17.5 14.1 17.5 167.5 98.3 13.5

1997 0.6 -7.5 28.0 5 28 154.7 na 12.4

Crisis ResolvedCrisis Resolved Luckily, due to quick response by the U.S. Luckily, due to quick response by the U.S.

government in providing loans, the crisis was government in providing loans, the crisis was resolved rather quickly.resolved rather quickly.

It could have gone on for a long period of time due to It could have gone on for a long period of time due to Mexico’s poor condition at the time.Mexico’s poor condition at the time.

Some of these aid packages were even structured into Some of these aid packages were even structured into the NAFTA agreement.the NAFTA agreement.

In the U.S., many policymakers feel that the decision to In the U.S., many policymakers feel that the decision to strongly aid Mexico was a poor choice because Mexico strongly aid Mexico was a poor choice because Mexico has not become as prosperous as some would have liked.has not become as prosperous as some would have liked.

However, most think that the choice the U.S. made to However, most think that the choice the U.S. made to assist Mexico was the correct one because as one person assist Mexico was the correct one because as one person put it, “Mexico is not going away” and the U.S. will be put it, “Mexico is not going away” and the U.S. will be better off if Mexico is better off.better off if Mexico is better off.