Mexican Financial Crisis

1
Mexican Financial Crisis

• The Lost Decade 1980s and the Tequila Effect
  1994
• By Keith Aldis

2
1982 1986 Causes

• Current Account deficit
• Heavy government borrowing of short term loans
• Depletion of government foreign reserves
• Higher U.S. interest rates due to Volcker's
  anti-inflation policies
• Falling oil-prices
• Large capital outflows
• Peso devaluation

3
Gross Domestic Product
4
Solutions and lessons

• IMF injection of 4.55 billion to keep from
  defaulting
• 3.625 billion from United States to be repaid in
  1 year
• Long process of stagnation and slow growth for
  years
• Crisis spread throughout most of Latin world

5
1994 - Causes

• Political upheaval, assassination, and loss of
  confidence
• Current account deficit and Capital flight
• Peso devaluation
• Large amounts of credit flow domestic and foreign
• Liberalization of the then privatized financial
  sector

6
Peso Devaluation
7
Mexican Import and Export
8
Solutions and lessons

• 48.8 billion from IMF
• 20 billion from U.S.
• Loans were repaid rapidly
• Mexico quickly recovered and returned to global
  markets
• Spread to other Latin countries did not occur to
  a great extent
• End of crawling pegged exchange rate policy and
  beginning of floating system

9
Conclusion

• Mexico learned to not get itself that position
  again with a current account deficit and easily
  retractable capital in-flows.
• They learned not to overvalue their currency for
  fear of another great devaluation and start
  floating exchange rate policy
• Privatized many industries opening them up to
  foreign markets and reaping the rewards of FDI