Thayer Watkins The Mexican Peso Crisis of Whereas the financial crisis in Mexico in had to do with external debt and took a long time for recovery the peso crisis of had little to do with external but instead was due to a short-term foreign exchange problem that was handled relatively quickly. In part, this quick recovery was due to the quick response of the U.
Precursors[ edit ] With being the final year of his administration's sexenio the country's six-year executive term limitthen- President Carlos Salinas de Gortari endorsed Luis Donaldo Colosio as the Institutional Revolutionary Party 's PRI presidential candidate for the Mexico's general election.
In accordance with party tradition during election years, Salinas de Gortari began an unrecorded spending spree. These bills offered a lower yield than Mexico's traditional peso-denominated treasury bills, called "cetes", but their dollar-denominated returns were more attractive to foreign investors.
Upon NAFTA's entry into force on January 1,Mexican businesses as well as the Mexican government enjoyed access to new foreign capital thanks to foreign investors eager to lend more money.
International perceptions of Mexico's political risk began to shift, however, when the Zapatista Army of National Liberation declared war on the Mexican government and began a violent insurrection in Chiapas.
Investors further questioned Mexico's political uncertainties and stability when PRI presidential candidate Luis Donaldo Colosio was assassinated while campaigning in Tijuana in Marchand began setting higher risk premia on Mexican financial assets.
Higher risk premia initially had no effect on the peso's value because Mexico had a fixed-exchange rate. To accomplish this, the central bank would frequently intervene in the open markets and buy or sell pesos to maintain the peg. The central bank's intervention strategy partly involved issuing new short-term public debt instruments denominated in U.
The bank's aim in mitigating the peso's depreciation was to protect against inflationary risks of having a markedly weaker domestic currency. With the peso stronger than it ought to have been, domestic businesses and consumers began purchasing increasingly more imports, and Mexico began running a large trade deficit.
Instead of allowing its monetary base to contract and its interest rates to rise, the central bank purchased treasury bills to prop up its monetary base and prevent rising interest rates—especially given that was an election year.
Additionally, servicing the tesobonos with U. The central bank's foreign exchange reserves began to dwindle and it completely ran out of U.
Investors flocked to foreign investments and placed even higher risk premia on domestic assets. This increase in risk premia placed additional upward market pressure on Mexican interest rates as well as downward market pressure on the Mexican peso. To discourage such capital flight, particularly from debt instruments, the Mexican central bank raised interest rates, but higher borrowing costs ultimately hindered economic growth prospects.
Foreign investors not only fled Mexico but emerging markets in general, and the crisis led to financial contagion throughout other financial markets in Asia and Latin America. President Bill Clinton held a meeting with newly confirmed U.
Treasury Secretary Robert RubinU. According to Summers' recollection of the meeting: Secretary Rubin set the stage for it briefly. Then, as was his way, he turned to someone else, namely me, to explain the situation in more detail and our proposal.
The package established loan guarantees for Mexican public debt aimed at alleviating its growing risk premia and boosting investor confidence in its economy.
The Mexican economy experienced a severe recession and the peso's value deteriorated substantially despite the bailout's success in preventing a worse collapse.
|The Mexican peso crisis | Treasury Today||Mexican peso crisis Save The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U. The Mexican treasury began issuing short-term debt instruments denominated in domestic currency with a guaranteed repayment in U.|
Growth did not resume until the late s. The loan guarantees allowed Mexico to restructure its short-term public debt and improve market liquidity. It drew criticism from members of the U. Congress as well as scrutiny from the news media.
Some congressional representatives agreed with American economist and former Chairman of the Federal Deposit Insurance CorporationL.The Mexican crisis of raised throughout the world a number of questions about the sustainability -- and even the merits -- of the market oriented reform process in Latin America and other regions.
Understanding how events unfolded in Mexico during the early s continues to be fundamentally.
In a word, the economic crisis in Mexico – often referred to as the Mexican peso crisis – can be attributed to overspending. But, as with all crises, there is far . In a word, the economic crisis in Mexico – often referred to as the Mexican peso crisis – can be attributed to overspending. But, as with all crises, there is far . Mexican peso crisis, but which are not sufficiently stressed in the literature, 5 is that international capital markets, though generally efficient, do have some imperfections, .
Mexican peso crisis, but which are not sufficiently stressed in the literature, 5 is that international capital markets, though generally efficient, do have some imperfections, .
Another important contributing factor to the debacle of the peso was the replacement of almost the entire short-term government debt from peso-denominated to dollar-denominated instruments (the Tesobonos) because it vastly increased the risk of default.
The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U.S.
dollar in December , which became one of the first international financial crises ignited by capital flight. Aug 06, · The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U.S.
dollar in December , which became one of the first international financial crises ignited by capital flight. The Mexican Peso Crisis: the Foreseeable and the Surprise SUMMARY The financial debacle that followed the Mexican devaluation in December left many analysts.