Preview

The Mexican Peso Crisis

Better Essays
Open Document
Open Document
2732 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Mexican Peso Crisis
The situation that arose in Mexico in 1995 after the devaluation of the peso by 15% sent the currency into a downward spiral over the succeeding months in what became known as the Mexican Peso Crisis. A currency crisis is defined by a sharp and unexpected decrease in the value of the currency. This was precisely the case in Mexico, losing over 60% of its value in less than four months. The drastic nature of the crisis came as a surprise to many because of the unprecedented success of the Mexican economy in the years before. Mexico had curbed its inflation, posted very impressive growth rates, and was reaping the global benefits of the imminent North American Free Trade Agreement. It certainly looked as if this historically unstable nation made a stand to become just the opposite, a country that stressed political and economic stability and strength. The seeds of the crisis had been planted in the form of policies, actions, and events that created an increasingly vulnerable economy and disaster was on the horizon. The following paper will examine both the causes and effects of the Mexican Peso Crisis of 1994. First, we must look back to the presidential term of Carlos Salinas and the policy actions that were undertaken in the early 1990s up through the months before the crisis. The growing state of vulnerability that the economy was subjected to was a direct result of decisions made during his term and the short term speculative investment during the same time. Secondly, we must be informed of the very unfavorable Mexican political climate in the months preceding the 1994 elections. Investor faith in Mexico declined drastically before the actual election due to both endogenous and exogenous economic factors. Then, the handling of the deteriorating economic situation and the devaluation of the peso by the new President, Ernesto Zedillo, which brought the country into the murky depths of a currency crisis shall be discussed. And finally, the speedy


Bibliography: Gordon, Robert. Macroeconomics. Eighth Edition, Addison-Wesley, Reading, MA, 2000. Heath, Jonathon. Mexico and the Sexenio Curse: Presidential Successions and Economic Crises in Modern Mexico. CSIS Press, Washington, D.C., 1999. Kleinberg, Remonda. Strategic Alliances and Other Deals: State-Business Relations and Economic Reform in Mexico. Carolina Academic Press, Durham, NC, 1999. OECD Economic Surveys: Mexico 1994-1995. Paris, France, 1995. OECD Economic Surveys: Mexico 1996-1997. Paris, France, 1997 Roett, Riordan, ed. The Mexican Peso Crisis: International Perspectives. Lynne Rienner Publishers, Boulder, CO, 1996.

You May Also Find These Documents Helpful

  • Good Essays

    Mexican Peso Case Study

    • 978 Words
    • 4 Pages

    1. Take a look at Mexico’s balance of payments over the past few years. Use the schedule I have attached to the case – it is in the same format as we used to examine the U.S. balance of payments. What do the trade and current account balances suggest about the likelihood of a potential devaluation of the peso? Why?…

    • 978 Words
    • 4 Pages
    Good Essays
  • Good Essays

    “When the U.S. dollar was introduced on April 2, 1792, it was based on the peso with the exchange rate of 1 dollar to 1 peso” (“What is the Mexican peso?, n.d.). Since that time the exchange rate of Mexican peso to United States dollar has changed considerably. Due to supply and demand of products produced by either country the exchange will rise and fall. Consequently products produced by either country result in a higher or lower demand for that product resulting in the amount that the currency is worth in that country when exchanged for another countries currency. For example, if Mexico produced a product that was in high demand in the United States the Mexican Peso’s exchange rate would rise and the United States dollar would fall because it would take more dollars to equal 1…

    • 937 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Argentina, once the world’s seventh-largest economy, has long been considered one of Latin America’s worst basket cases. Starting with Juan Peron, who was first elected president in 1946, and for decades after, profligate government spending financed by a compliant central bank that printed money to cover the chronic budget deficits had triggered a vicious cycle of inflation and devaluation. High taxes and excessive controls compounded Argentina’s woes and led to an overregulated, arthritic economy. However, in 1991, after the country had suffered nearly 50 years of economic mismanagement, President Carlos Menem and his fourth Minister of Economy, Domingo Cavallo, launched the Convertibility Act. (The first Minister of Economy, Miguel Roig, took one look at the economy and died of a heart attack six days into the job.) This act made the austral (the Argentine currency) fully convertible at a fixed rate of 10,000 australs to the dollar, and by law the monetary supply had to be 100% backed by gold and foreign currency reserves, mostly dollars. This link to gold and the dollar imposed a straitjacket on monetary policy. If, for example, the central bank had to sell dollars to support the currency, the money supply automatically shrank. Better still, the government could no longer print money to finance a budget deficit. In January 1992, the government knocked four zeros off the austral and renamed it the peso, worth exactly $1.…

    • 1031 Words
    • 5 Pages
    Good Essays
  • Good Essays

    After sustained pressure from the United States and the International Monetary Fund, Mexico decided to change their global economic stance to one that supports the free market. They changed their economy to one based upon exports, they eliminated most tariffs while lowering others, attracted foreign direct investment and private state assets, and finally reduced government spending. These steps were taken at an effort for Mexico to join in on the economic benefits of globalization, but Mexico only finished half of the necessary adjustments necessary for economic prosperity. (Biggs, Shiess) Many residents of Mexico may blame their problems on issues such as the drug cartels, the lack of quality jobs, or lack of foreign investment. Although these ideas may contribute to the problems that control Mexico, they are not the true reason. After Mexico completed their globalization efforts by using the ideas of macroeconomics, they had only completed half the necessary adjustments to truly compete as an economic superpower in the world today.(BBC News)…

    • 1061 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    This article is about how the value of the Mexican peso has dropped more than 30% compared to the dollar in the last month and has steadily been decreasing over the past several years. This has the citizens of Mexico worried that their economy will follow the path of Greece and other countries that have ended bankrupt. Expert economists however, argue that the decrease in the peso isn't necessarily a bad thing and the Mexico's economy has grown 2.5% in the last year and is estimated to keep on growing in the future. There are many factors that are to blame for the weakening of the peso but the biggest one is that the price of petroleum has decreased. The funds made by PEMEX, Mexico’s national petroleum…

    • 329 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    In 1998, Argentina entered what turned out to be a four-year depression, during which its economy shrank 28 percent. Argentina's experience has been cited as an example of the failure of free markets and fixed exchange rates. Contrarily, Argentina's economic woes have been attributed to bad economic policies which converted a typical recession into a full depression. Three big tax increases in 2000-2001 discouraged growth, and interfering with the monetary system in mid 2001 created fear of currency devaluation. Consequently, the confidence people had in Argentina's government finances evaporated. "In a series of mishaps that made the situation ever worse, from December 2001 to early 2002, succeeding governments undermined property rights by freezing bank deposits; defaulting on the government's foreign debt; ending the Argentine peso's longstanding link to the dollar; forcibly converting dollar deposits and loans into Argentine pesos at unfavorable rates; and voiding contracts."…

    • 1910 Words
    • 8 Pages
    Better Essays
  • Best Essays

    art and science

    • 5036 Words
    • 30 Pages

    Edwards, P (1995) Crisis and Reform in Latin American from Despair to Hope. New York: The World Bank…

    • 5036 Words
    • 30 Pages
    Best Essays
  • Powerful Essays

    El Salvador a Business Study

    • 4752 Words
    • 20 Pages

    Positioning the United States as its key trading partner was accomplished via dollarization. Accepting the US dollar as its sole form of currency eased trade complications between El Salvador and the US and eliminated volatility of the Colón in the foreign exchange market. This dollarization gave Salvadoran industry the credibility of the US dollar, eliminating or limiting national inflationary effects upon trade. This dollarization, however, lessens the Salvadorans control on their economy through fiscal policy, but also serves to prohibit political instability’s effect on the currency.…

    • 4752 Words
    • 20 Pages
    Powerful Essays
  • Satisfactory Essays

    devaluation

    • 463 Words
    • 2 Pages

    There has been much debate in Venezuela over the cause and likely consequences of the latest currency devaluation, while the concrete political and economic impact remains to be seen. The Venezuelan government’s decision to devalue the Bolivar by 32%, from 4.3 to 6.3 Bolivars to the dollar, was a measure seen as inevitable after the Bolivar fell to under a quarter of its official value on the black market. The devaluation can help narrow the budget deficit by increasing the amount of Bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation. The devaluation of currency and exchange has led the Venezuelan economy to have overly high inflation. This devaluation has caused higher consumer inflation on goods thus affecting the total spending on imported goods. The government’s creation of two additional bolivars for each dollar received is creating money, no different from creating money without the devaluation. The main difference is that, in addition to any inflationary impact of creating more money, the devaluation also adds to inflation by raising the price of imported goods. The country is also experiencing a shortage of U.S dollars, which is making it hard for the country to pay for imports. The need for a large devaluation reflects the large macro imbalances that have been…

    • 463 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Finance Review

    • 1678 Words
    • 7 Pages

    1. In December 1994 the government of Mexico officially changed the value of the Mexican peso…

    • 1678 Words
    • 7 Pages
    Good Essays
  • Best Essays

    Monetary Economics

    • 2184 Words
    • 9 Pages

    Edwards, S. (1989). Exchange Controls, Devaluations, and Real Exchande Rates:The Latin American Experiance. The University of Chacago.…

    • 2184 Words
    • 9 Pages
    Best Essays
  • Good Essays

    In the preceding five years, the value of the Mexican Peso had dramatically increased and decreased against most international currencies, and the majority of analysts refused to guess when it would stop varying so wildly. The value of the Korean Won per Peso had ranged from…

    • 897 Words
    • 4 Pages
    Good Essays
  • Good Essays

    What are the major factors that caused the peso to fall in value against the dollar? What has the government done to reverse the recession?…

    • 884 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Santaella, J, and Vela, A. E. (1996). The 1987 Mexican Disinflation Program: An Exchange Rate–…

    • 3709 Words
    • 15 Pages
    Powerful Essays
  • Powerful Essays

    This paper tackles the effects of the foreign exchange rate as a whole and how it affects the country and at the same time how it gets affected. This paper enumerates the advantages and disadvantages of having a strong Peso. The paper also discusses what factors affect the strengthening and weakening of the Philippine Peso. This paper also includes an in depth analysis of how the foreign exchange could affect and gets affected by the economy, the society and politics.…

    • 3768 Words
    • 16 Pages
    Powerful Essays