![Mexico inflation rate](https://upload.wikimedia.org/wikipedia/commons/7/7a/Mexico_inflation_rate.webp)
The Mexican peso crisis was a
currency crisis
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated deb ...
sparked by the Mexican government's sudden
devaluation
In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curren ...
of the
peso
The peso is the monetary unit of several countries in the Americas, and the Philippines. Originating in the Spanish Empire, the word translates to "weight". In most countries the peso uses the Dollar sign, same sign, "$", as many currencies na ...
against the
U.S. dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
in December 1994, which became one of the first international
financial crises
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
ignited by
capital flight
Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of a political event such as regime change or economic globalization. Such events could be an increas ...
.
During the
1994 presidential election, the incumbent administration embarked on an expansionary fiscal and monetary policy. The
Mexican treasury began issuing
short-term debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
instruments denominated in domestic currency with a guaranteed repayment in U.S. dollars, attracting foreign investors. Mexico enjoyed investor
confidence
Confidence is a state of being clear-headed either that a hypothesis or prediction is correct or that a chosen course of action is the best or most effective. Confidence comes from a Latin word 'fidere' which means "to trust"; therefore, having ...
and new access to international capital following its signing of the
North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
(NAFTA). However, a
violent uprising in the state of
Chiapas
Chiapas (; Tzotzil language, Tzotzil and Tzeltal language, Tzeltal: ''Chyapas'' ), officially the Free and Sovereign State of Chiapas ( es, Estado Libre y Soberano de Chiapas), is one of the states that make up the Political divisions of Mexico, ...
, as well as the assassination of the presidential candidate
Luis Donaldo Colosio
Luis Donaldo Colosio Murrieta (; 10 February 1950 – 23 March 1994) was a Mexican politician, economist, and Institutional Revolutionary Party (PRI) presidential candidate, who was assassinated at a campaign rally in Tijuana during the Mexic ...
, resulted in political instability, causing investors to place an increased
risk premium
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less t ...
on Mexican assets.
In response, the Mexican central bank intervened in the foreign exchange markets to maintain the Mexican peso's
peg to the U.S. dollar by issuing dollar-denominated public debt to buy pesos. The peso's strength caused demand for imports to increase in Mexico, resulting in a
trade deficit
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
.
Speculators
In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.)
Many s ...
recognized an overvalued peso and capital began flowing out of Mexico to the United States, increasing downward market pressure on the peso. Under election pressures, Mexico purchased its own treasury securities to maintain its
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
and avert rising interest rates, drawing down the bank's dollar reserves. Supporting the money supply by buying more dollar-denominated debt while simultaneously honoring such debt depleted the bank's reserves by the end of 1994.
The central bank devalued the peso on December 20, 1994, and foreign investors' fear led to an even higher
risk premium
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less t ...
. To discourage the resulting capital flight, the bank raised interest rates, but higher
costs of borrowing merely hurt economic growth. Unable to sell new issues of public debt or efficiently purchase dollars with devalued pesos, Mexico faced a
default. Two days later, the bank allowed the peso to
float freely, after which it continued to depreciate. The Mexican economy experienced
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
of around 52% and
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s began liquidating Mexican assets as well as
emerging market
An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or were ...
assets in general. The effects spread to economies in Asia and the rest of Latin America. The United States organized a $50 billion bailout for Mexico in January 1995, administered by the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
(IMF) with the support of the
G7 and
Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
. In the aftermath of the crisis, several of Mexico's banks collapsed amidst widespread mortgage defaults. The Mexican economy experienced a severe
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
and poverty and unemployment increased.
Precursors
![MONUMENTO A LUIS DONALDO COLOSIO MURRIETA](https://upload.wikimedia.org/wikipedia/commons/d/d9/MONUMENTO_A_LUIS_DONALDO_COLOSIO_MURRIETA.jpg)
With 1994 being the final year of his administration's
sexenio (the country's six-year executive term limit), then-
President
President most commonly refers to:
*President (corporate title)
*President (education), a leader of a college or university
*President (government title)
President may also refer to:
Automobiles
* Nissan President, a 1966–2010 Japanese ful ...
Carlos Salinas de Gortari
Carlos Salinas de Gortari CYC DMN (; born 3 April 1948) is a Mexican economist and politician who served as 60th president of Mexico from 1988 to 1994. Affiliated with the Institutional Revolutionary Party (PRI), earlier in his career he wor ...
endorsed
Luis Donaldo Colosio
Luis Donaldo Colosio Murrieta (; 10 February 1950 – 23 March 1994) was a Mexican politician, economist, and Institutional Revolutionary Party (PRI) presidential candidate, who was assassinated at a campaign rally in Tijuana during the Mexic ...
as the
Institutional Revolutionary Party
The Institutional Revolutionary Party ( es, Partido Revolucionario Institucional, ; abbr. PRI) is a political party in Mexico that was founded in 1929 and held uninterrupted power in the country for 71 years, from 1929 to 2000, first as the Nati ...
's (PRI) presidential candidate for Mexico's
1994 general election. In accordance with party tradition during election years, Salinas de Gortari began an unrecorded spending spree. Mexico's
current account deficit
In economics, a country's current account records the value of exports and imports of both goods and services and international transfers of capital. It is one of the two components of its balance of payments, the other being the capital accoun ...
grew to roughly 7% of
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is often ...
that same year, and Salinas de Gortari allowed the
Secretariat of Finance and Public Credit
The Secretariat of the Treasury and Public Credit ( es, Secretaría de Hacienda y Crédito Público, SHCP) is the finance ministry of Mexico. The Secretary of the Treasury is the head of the department, and is a member of the federal executive ...
, Mexico's
treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or in p ...
, to issue short-term peso-denominated treasury bills with a guaranteed repayment denominated in U.S. dollars, called "''tesobonos''". 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.
![EZLN_insurgents_in_Mexico](https://upload.wikimedia.org/wikipedia/commons/9/99/EZLN_insurgents_in_Mexico.png)
Investor confidence rose after the
North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
(NAFTA) was signed. Upon NAFTA's entry into force on January 1, 1994, 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
Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Po ...
began to shift, however, when the
Zapatista Army of National Liberation
The Zapatista Army of National Liberation (, EZLN), often referred to as the Zapatistas (Mexican ), is a far-left political and militant group that controls a substantial amount of territory in Chiapas, the southernmost state of Mexico.
Sin ...
declared war on the Mexican government and began a
violent insurrection in
Chiapas
Chiapas (; Tzotzil language, Tzotzil and Tzeltal language, Tzeltal: ''Chyapas'' ), officially the Free and Sovereign State of Chiapas ( es, Estado Libre y Soberano de Chiapas), is one of the states that make up the Political divisions of Mexico, ...
. Investors further questioned Mexico's political uncertainties and stability when PRI presidential candidate
Luis Donaldo Colosio
Luis Donaldo Colosio Murrieta (; 10 February 1950 – 23 March 1994) was a Mexican politician, economist, and Institutional Revolutionary Party (PRI) presidential candidate, who was assassinated at a campaign rally in Tijuana during the Mexic ...
was
assassinated
Assassination is the murder of a prominent or important person, such as a head of state, head of government, politician, world leader, member of a royal family or CEO. The murder of a celebrity, activist, or artist, though they may not have a ...
while campaigning in
Tijuana
Tijuana ( ,["Tijuana"](_blank)
(US) and [< ...]
in March 1994, and 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.
Mexico's central bank,
Banco de México
The Bank of Mexico ( es, Banco de México), abbreviated ''BdeM'' or ''Banxico,'' is Mexico's central bank, monetary authority and lender of last resort. The Bank of Mexico is autonomous in exercising its functions, and its main objective is to ac ...
, maintained the peso's value through an exchange rate peg to the U.S. dollar, allowing the peso to
appreciate or depreciate against the dollar within a narrow band. 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.S. dollars. They then used the borrowed dollar capital to purchase pesos in the
foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
, which, in turn, caused the peso to appreciate. The bank's purpose in mitigating the peso's depreciation was to protect against inflationary risks of having a markedly weaker domestic currency, but 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
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
.
Speculators
In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.)
Many s ...
began recognizing that the peso was artificially overvalued and led to speculative
capital flight
Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence or as the result of a political event such as regime change or economic globalization. Such events could be an increas ...
that further reinforced downward market pressure on the peso.
Mexico's central bank deviated from standard central banking policy when it fixed the peso to the dollar in 1988. Instead of allowing its
monetary base
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This include ...
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 1994 was an
election year. Additionally, servicing the tesobonos with U.S. dollar repayments further drew down the central bank's foreign exchange reserves.
Consistent with the
macroeconomic trilemma in which a country with a fixed exchange rate and free flow of
financial capital
Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide ...
sacrifices
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
autonomy, the central bank's interventions to revalue the peso caused Mexico's money supply to contract (without an exchange rate peg, the currency would have been allowed to depreciate). The central bank's foreign exchange reserves began to dwindle and it completely ran out of U.S. dollars in December 1994.
Crisis
On December 20, 1994, newly inaugurated President
Ernesto Zedillo
Ernesto Zedillo Ponce de León (; born 27 December 1951) is a Mexican economist and politician. He was 61st president of Mexico from 1 December 1994 to 30 November 2000, as the last of the uninterrupted 71-year line of Mexican presidents from t ...
announced the Mexican central bank's devaluation of the peso between 13% and 15%.
Devaluing the peso after previous promises not to do so led investors to be skeptical of policymakers and fearful of additional devaluations. 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.
Foreign investors anticipating further currency devaluations began rapidly withdrawing capital from Mexican investments and selling off shares of stock as the
Mexican Stock Exchange
The Mexican Stock Exchange ( es, Bolsa Mexicana de Valores), commonly known as Mexican Bolsa, Mexbol, or BMV, is one of two stock exchanges in Mexico, the other being BIVA - Bolsa Institucional de Valores. It is the second largest stock exchange ...
plummeted. To discourage such capital flight, particularly from debt instruments, the Mexican central bank raised interest rates, but higher borrowing costs ultimately hindered
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
prospects.
When the time came for Mexico to roll over its
maturing debt obligations, few investors were interested in purchasing new debt.
To repay tesobonos, the central bank had little choice but to purchase dollars with its severely weakened pesos, which proved extremely expensive.
The Mexican government faced an imminent
sovereign default
A sovereign default is the failure or refusal of the
government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
.
On December 22, the Mexican government allowed the peso to
float
Float may refer to:
Arts and entertainment Music Albums
* ''Float'' (Aesop Rock album), 2000
* ''Float'' (Flogging Molly album), 2008
* ''Float'' (Styles P album), 2013
Songs
* "Float" (Tim and the Glory Boys song), 2022
* "Float", by Bush ...
, after which the peso depreciated another 15%.
The value of the Mexican peso depreciated roughly 50% from 3.4
MXN/USD to 7.2, recovering only to 5.8 MXN/USD four months later. Prices in Mexico rose by 24% over the same four months, and total
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
in 1995 was 52%.
Mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s, which had invested in over $45 billion worth of Mexican assets in the several years leading up to the crisis, began liquidating their positions in Mexico and other
developing countries
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
. Foreign investors not only fled Mexico but
emerging markets
An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or were ...
in general, and the crisis led to
financial contagion
Financial contagion refers to "the spread of market disturbances mostly on the downside from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows". Financial contag ...
throughout other financial markets in
Asia
Asia (, ) is one of the world's most notable geographical regions, which is either considered a continent in its own right or a subcontinent of Eurasia, which shares the continental landmass of Afro-Eurasia with Africa. Asia covers an area ...
and
the Americas
The Americas, which are sometimes collectively called America, are a landmass comprising the totality of North America, North and South America. The Americas make up most of the land in Earth's Western Hemisphere and comprise the New World. ...
.
The impact of Mexico's crisis in
Chile
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
and
Brazil
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
became known as the "Tequila effect" ( es, efecto tequila).
Bailout
In January 1995, U.S.
President Bill Clinton
William Jefferson Clinton (né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and again f ...
held a meeting with newly confirmed
U.S. Treasury Secretary Robert Rubin
Robert Edward Rubin (born August 29, 1938) is an American retired banking executive, lawyer, and former government official. He served as the 70th United States Secretary of the Treasury during the Clinton administration. Before his government s ...
, U.S. Federal Reserve Chairman
Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
and then-Under Secretary for the Treasury
Larry Summers
Lawrence Henry Summers (born November 30, 1954) is an American economist who served as the 71st United States secretary of the treasury from 1999 to 2001 and as director of the National Economic Council from 2009 to 2010. He also served as pres ...
to discuss an American response. 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. And I said that I felt that was required, and one of the President’s political advisers said, “Larry, you mean .” And I said, “No, I mean .” ... There was a certain pall over the room, and one of his linton'sother political advisers said, “Mr. President, if you send that money to Mexico and it doesn’t come back before 1996, you won’t be coming back after 1996.”
Clinton decided nevertheless to seek Congressional approval for a bailout and began working with Summers to secure commitments from Congress.
Motivated to deter a potential surge in
illegal immigration
Illegal immigration is the migration of people into a country in violation of the immigration laws of that country or the continued residence without the legal right to live in that country. Illegal immigration tends to be financially upwar ...
and to mitigate the spread of investors' lack of
confidence
Confidence is a state of being clear-headed either that a hypothesis or prediction is correct or that a chosen course of action is the best or most effective. Confidence comes from a Latin word 'fidere' which means "to trust"; therefore, having ...
in Mexico to other developing countries, the United States coordinated a $50 billion
bailout
A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy.
A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global sys ...
package in January 1995, to be administered by the IMF with support from the
G7 and the
Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
(BIS). The package established
loan guarantee
A loan guarantee, in finance, is a promise by one party (the guarantor) to assume the debt obligation of a borrower if that borrower defaults. A guarantee can be limited or unlimited, making the guarantor liable for only a portion or all of the d ...
s for Mexican public debt aimed at alleviating its growing risk premia and boosting investor confidence in its economy. The
Mexican economy
The economy of Mexico is a developing mixed-market economy. It is the 15th largest in the world in nominal GDP terms and the 13th largest by purchasing power parity, according to the International Monetary Fund. Since the 1994 crisis, admin ...
experienced a severe
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
and the peso's value deteriorated substantially despite the bailout's success in preventing a worse
collapse
Collapse or its variants may refer to:
Concepts
* Collapse (structural)
* Collapse (topology), a mathematical concept
* Collapsing manifold
* Collapse, the action of collapsing or telescoping objects
* Collapsing user interface elements
** ...
. Growth did not resume until the late 1990s.
The
conditionality
In political economy and international relations, conditionality is the use of conditions attached to the provision of benefits such as a loan, debt relief or bilateral aid. These conditions are typically imposed by international financial institu ...
of the bailout required the Mexican government to institute new
monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
and
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
controls, although the country refrained from
balance of payments
In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a ...
reforms such as trade
protectionism
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. ...
and strict
capital control
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measure ...
s to avoid violating its commitments under
NAFTA
The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
. The loan guarantees allowed Mexico to restructure its short-term public debt and improve
market liquidity
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...
.
Of the approximately assembled in the bailout, was contributed by the United States, by the IMF, by the BIS, by a consortium of Latin American nations, and
CAD
Computer-aided design (CAD) is the use of computers (or ) to aid in the creation, modification, analysis, or optimization of a design. This software is used to increase the productivity of the designer, improve the quality of design, improve co ...
$1 billion by Canada.
The
Clinton administration
Bill Clinton's tenure as the 42nd president of the United States began with his first inauguration on January 20, 1993, and ended on January 20, 2001. Clinton, a Democrat from Arkansas, took office following a decisive election victory over Re ...
's efforts to organize a bailout for Mexico were met with difficulty. It drew criticism from members of the
U.S. Congress
The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
as well as scrutiny from the
news media
The news media or news industry are forms of mass media that focus on delivering news to the general public or a target public. These include news agencies, print media (newspapers, news magazines), broadcast news (radio and television), and th ...
.
The administration's position centered on three principal concerns: potential
unemployment in the United States
Unemployment in the United States discusses the causes and measures of U.S. unemployment and strategies for reducing it. Job creation and unemployment are affected by factors such as economic conditions, global competition, education, autom ...
in the event Mexico would have to reduce its imports of U.S. goods (at the time, Mexico was the third-largest consumer of U.S. exports);
political instability Political decay is a political theory, originally described by Samuel P. Huntington, which describes how chaos and disorder can arise from social modernization increasing more rapidly than political and institutional modernization. Huntington provi ...
and violence in a neighboring country; and a potential surge in
illegal immigration
Illegal immigration is the migration of people into a country in violation of the immigration laws of that country or the continued residence without the legal right to live in that country. Illegal immigration tends to be financially upwar ...
from Mexico. Some congressional representatives agreed with American economist and former Chairman of the
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cred ...
,
L. William Seidman, that Mexico should just negotiate with creditors without involving the United States, especially in the interest of deterring
moral hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
. On the other hand, supporters of U.S. involvement such as
Fed Chair Alan Greenspan
Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
argued that the fallout from a Mexican
sovereign default
A sovereign default is the failure or refusal of the
government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
would be so devastating that it would far exceed the risks of moral hazard.
Following the
U.S. Congress
The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
's failure to pass the Mexican Stabilization Act, the
Clinton administration
Bill Clinton's tenure as the 42nd president of the United States began with his first inauguration on January 20, 1993, and ended on January 20, 2001. Clinton, a Democrat from Arkansas, took office following a decisive election victory over Re ...
reluctantly approved an initially dismissed proposal to designate funds from the
U.S. Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and t ...
's
Exchange Stabilization Fund The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank intervene directly) allows the US ...
as loan guarantees for Mexico.
These loans returned a handsome profit of $600 million and were even repaid ahead of maturity.
Then-
U.S. Treasury Secretary Robert Rubin
Robert Edward Rubin (born August 29, 1938) is an American retired banking executive, lawyer, and former government official. He served as the 70th United States Secretary of the Treasury during the Clinton administration. Before his government s ...
's appropriation of funds from the Exchange Stabilization Fund in support of the Mexican bailout was scrutinized by the
United States House Committee on Financial Services
The United States House Committee on Financial Services, also referred to as the House Banking Committee and previously known as the Committee on Banking and Currency, is the committee of the United States House of Representatives that oversees t ...
, which expressed concern about a potential
conflict of interest
A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations i ...
because Rubin had formerly served as co-chair of the board of directors of
Goldman Sachs
Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...
, which had a substantial share in distributing Mexican stocks and bonds.
Economic impacts
Mexico's economy experienced a severe
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
as a result of the peso's devaluation and the flight to safer investments. The country's GDP declined by 6.2% over the course of 1995. Mexico's financial sector bore the brunt of the crisis as banks collapsed, revealing low-quality assets and fraudulent lending practices. Thousands of
mortgages
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
went into
default as Mexican citizens struggled to keep pace with rising interest rates, resulting in widespread
repossession
Repossession, colloquially repo, is a "self-help" type of action, mainly in the United States, in which the party having right of ownership of the property in question takes the property back from the party having right of possession without in ...
of houses.
![Tijuana_residential_construction](https://upload.wikimedia.org/wikipedia/commons/e/e8/Tijuana_residential_construction.jpg)
In addition to declining GDP growth, Mexico experienced severe inflation and extreme poverty skyrocketed as
real wage
Real wages are wages adjusted for inflation, or, equivalently, wages in terms of the amount of goods and services that can be bought. This term is used in contrast to nominal wages or unadjusted wages.
Because it has been adjusted to account f ...
s plummeted and
unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for Work (human activity), w ...
nearly doubled. Prices increased by 35% in 1995. Nominal wages were sustained, but real wages fell by 25-35% over the same year. Unemployment climbed to 7.4% in 1995 from its pre-crisis level of 3.9% in 1994. In the formal sector alone, over one million people lost their jobs and average real wages decreased by 13.5% throughout 1995. Overall household incomes plummeted by 30% in the same year. Mexico's extreme poverty grew to 37% in 1996 from 21% in 1994, undoing the previous ten years of successful poverty reduction initiatives. The nation's poverty levels would not begin returning to normal until 2001.
Mexico's growing poverty affected
urban area
An urban area, built-up area or urban agglomeration is a human settlement with a high population density and infrastructure of built environment. Urban areas are created through urbanization and are categorized by urban morphology as cities, t ...
s more intensely than
rural area
In general, a rural area or a countryside is a geographic area that is located outside towns and cities. Typical rural areas have a low population density and small settlements. Agricultural areas and areas with forestry typically are descri ...
s, in part due to the urban population's sensitivity to
labor market volatility and macroeconomic conditions. Urban citizens relied on a healthy labor market,
access to credit Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services.Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). ''Finance for All?: ...
, and consumer goods.
Consumer price inflation
A consumer price index (CPI) is a price index, the price of a weighted average market basket of Goods, consumer goods and Service (economics), services purchased by households. Changes in measured CPI track changes in prices over time.
Ove ...
and a
tightening credit market during the crisis proved challenging for urban workers, while rural households shifted to
subsistence agriculture
Subsistence agriculture occurs when farmers grow food crops to meet the needs of themselves and their families on smallholdings. Subsistence agriculturalists target farm output for survival and for mostly local requirements, with little or no su ...
.
Mexico's gross
income per capita
The median income is the income amount that divides a population into two equal groups, half having an income above that amount, and half having an income below that amount. It may differ from the mean (or average) income. Both of these are ways of ...
decreased by only 17% in
agriculture
Agriculture or farming is the practice of cultivating plants and livestock. Agriculture was the key development in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that enabled people to ...
, contrasted with 48% in the
financial sector
Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, ...
and 35% in the
construction
Construction is a general term meaning the art and science to form objects, systems, or organizations,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Press 2009 and com ...
and
commerce
Commerce is the large-scale organized system of activities, functions, procedures and institutions directly and indirectly related to the exchange (buying and selling) of goods and services among two or more parties within local, regional, nation ...
industries. Average household
consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
declined by 15% from 1995 to 1996 with a shift in composition toward essential goods. Households saved less and spent less on healthcare.
Expatriate
An expatriate (often shortened to expat) is a person who resides outside their native country. In common usage, the term often refers to educated professionals, skilled workers, or artists taking positions outside their home country, either ...
s living abroad increased
remittance
A remittance is a non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland. Money sent home by migrants competes wit ...
s to Mexico, evidenced by average net unilateral transfers doubling between 1994 and 1996.
Households' lower demand for
primary healthcare
Primary health care, or PHC, refers to "essential health care" that is based on scientifically sound and socially acceptable methods and technology. This makes universal health care accessible to all individuals and families in a community. PHC in ...
led to a 7% hike in
mortality rates
Mortality rate, or death rate, is a measure of the number of deaths (in general, or due to a specific cause) in a particular population, scaled to the size of that population, per unit of time. Mortality rate is typically expressed in units of de ...
among infants and children in 1996 (from 5% in 1995).
Infant mortality
Infant mortality is the death of young children under the age of 1. This death toll is measured by the infant mortality rate (IMR), which is the probability of deaths of children under one year of age per 1000 live births. The under-five morta ...
increased until 1997, most dramatically in regions where women had to work as a result of economic need.
Critical scholars contend that the 1994 Mexican peso crisis exposed the problems of Mexico’s neoliberal turn to the
Washington consensus
The Washington Consensus is a set of ten economic policy prescriptions considered to constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monet ...
approach to development. Notably, the crisis revealed the problems of a privatized banking sector within a liberalized yet internationally subordinate economy that is dependent on foreign flows of finance capital.
See also
*
Economic history of Mexico
Since the colonial era, Mexico's economic history has been characterized by resource extraction, agriculture, and a relatively underdeveloped industrial sector. Economic elites in the colonial period were predominantly Spanish-born, active as ...
*
1998 Russian financial crisis
The Russian financial crisis (also called the ruble crisis or the Russian flu) began in Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the ruble and defaulting on its debt. The crisis had s ...
*
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
*
Index of Mexico-related articles
The following is an alphabetical index topics related to the Mexico.
0–8
* .mx – Internet country code top-level domain for México
A
*Adjacent countries:
:
:
:
*Adjacent states, departments, and districts
:Arizona (United States)
:Ca ...
*
Latin American economy
Latin America as a region has multiple nation-states, with varying levels of economic complexity. The Latin American economy is an export-based economy consisting of individual countries in the geographical regions of North America, Central Americ ...
*
Sudden stop (economics)
''Sudden Stop'' is the second studio album by Canadian blues musician Colin James released in 1990 on Virgin Records. The album was recorded in Vancouver and Memphis, Tennessee.
The album features guest appearances by Bonnie Raitt, The Memphis ...
References
Further reading
*
*
External links
Economic Unrest in Mexicofrom th
Dean Peter Krogh Foreign Affairs Digital Archives
{{Financial crises
1994 in economics
December 1994 events in Mexico
Economic history of Mexico
Financial crises