The Mexican Peso Crisis Essay - 1602 Words

The Mexican Peso Crisis This paper argues that the Mexican peso crisis of December 20 should have been expected and foreseeable. In the year preceding the crisis, there were several indicators suggesting that the Mexican economy and peso were already under extreme pressure. The economy bubble was ballooning to burst so much so that it was simply a crisis waiting to happen. Evidences Signaling the Crisis 1. Decreasing Current Account Deficit versus Increasing Capital Account Balance Mexico was running an increasing current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of private investing over private savings. However, the country was able to maintain an improving fiscal†¦show more content†¦Colosio. To counter the impact of federal fund rate increase on peso, Mexican government raised the domestic interest rate by selling more short-term government bonds. The interest rate for peso-denominated cetes rose to 15.79% in April 1994 and increased to 17.07% in July 1994. However, in the second half of 1994, the Mexican government started to reduce the interest rate, contrary to the federal fund rate. Also, more of dollar-denominated tesobonos were issued aggressively instead of peso-denominated cetes. This was likely due to investors being more willing to hold tesobonos as they will be covered against the risks of devaluation and also lower interest rate for tesobonos than cetes. This was an indication that there was a loss in confidence for peso (i.e. people expected that the peso will devaluate to a point that even the differential in interest will not be able to cover and so were unwilling to hold on to peso-denominated bonds). 4. Declining Real GDP Growth The Mexico?s inflation rate was really not in control as promised by the Mexican government. The Consumer Price Index was on the rise and real GDP growth has declined from 4.5% in 1990 to 0.6% in 1993. This shows that Mexico will experience more rapid inflation than United States in the coming year. This also means that Mexico peso will lose more value than US dollar during the year ahead. Hence, there will be anShow MoreRelatedThe Mexican Peso Crisis2040 Words   |  9 Pagesâ€Å"exchange rate policy of maintaining the peso within a well defined band against the US dollar† (Truman,1996.199). As the current account deficit rose this policy had come under pressure. The devaluation on December 20 fail to stabilize peso and two days later was forced to let it float, causing its external value to plummet. In this paper I will analyze the build up leading to the Mexican peso crisis â€Å"Tequila crisis† of 1994. Explaining the cause and effect of the crisis as well as the economic and politicalRead MoreThe Mexican Peso Crisis3752 Words   |  16 PagescrisisThe Mexican Peso Crisis 1994 Globalization Project Report Report submitted by: Akanksha Agrawal Namit Agrawal Saurabh Harkauli Apurv Jain Gaurav Jain Nikhil Jaiswal Ahamed Moidu Tushar Pandey D001 D002 D021 D023 D025 D028 D039 D046 The Mexican Peso Crisis - 1994 CONTENTS S. No. Topic 1 2 3 4 5 6 7 8 9 10 11 12 13 Introduction Political Turmoil 1993 – 1994 Scenario In Mexico Foreign Capital Inflow Sterilization Intervention Conversion Of Cetes To Tesobonos Dealing With The Crisis The DecemberRead MoreThe Mexican Peso Crisis3767 Words   |  16 PagescrisisThe Mexican Peso Crisis 1994 Globalization Project Report Report submitted by: Akanksha Agrawal Namit Agrawal Saurabh Harkauli Apurv Jain Gaurav Jain Nikhil Jaiswal Ahamed Moidu Tushar Pandey D001 D002 D021 D023 D025 D028 D039 D046 The Mexican Peso Crisis - 1994 CONTENTS S. No. Topic 1 2 3 4 5 6 7 8 9 10 11 12 13 Introduction Political Turmoil 1993 – 1994 Scenario In Mexico Foreign Capital Inflow Sterilization Intervention Conversion Of Cetes To Tesobonos Dealing With The Crisis The DecemberRead MoreThe Mexican Peso Crisis2721 Words   |  11 Pages1995 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. MexicoRead MoreMexican Devaluation Of The Mexican Peso Crisis Essay1412 Words   |  6 Pagesinvolving the Mexican government which led to the Mexican Peso Crisis. The argument has been whether sound monetary, fiscal and e xchange rate policies could have prevented the crisis or foreign intervention was inviable to control the crisis because of the effect to the global community. The purpose of this paper is to show that it was the policies of the Mexican government that caused the devaluation of the peso and thus the ensuing Mexican Peso Crisis. The 1994 Mexican Peso Crisis was a relativelyRead MoreEssay on The Economic Impact of the Mexican Peso Crisis1568 Words   |  7 Pagessaw the decline of the Mexican Peso, leading to what is now considered as the Mexican Peso Crisis. The crisis was characterized by the drastic decline in the value of the Mexican Peso. The Mexican Peso Crisis is considered significant because of its impact on other parts of the region, including Brazil. The following is a discussion of the causes and impact of the Mexican Peso Crisis. The events/causes that led up to the devaluation of the peso The Mexican Peso Crisis can be traced to the decisionRead MoreEssay on Mexican Peso Crisis: Irregularities of Deregulation2897 Words   |  12 PagesMexican Peso Crisis: Irregularities of Deregulation It is one thing to liberate an economy or a market; it is another to lift all regulations on such market. Economic liberalization should be done in an appropriate, intelligent manner. The lack of proper regulation can lead to a snowballing effect where a seemingly trivial matter can lead up to a terrible outcome. This was the case of Mexico in 1994 where birth was given to the â€Å"Tequila Effect†. What were the conditions in the country thatRead More The Mexican Peso Crisis: Could it have been stopped before it began?3254 Words   |  14 PagesThe Mexican Peso Crisis: Could it have been stopped before it began? During the six years of the Salinas presidency in Mexico (1988 - 1994), GDP growth averaged 3.3% per year, a number that exceeded the growth rate of the population (2%) but fell well short of growth in other poor, developing countries. Although growth was lagging behind the pace of other emerging markets, Mexican politicians were willing to sacrifice rapid economic expansion for stability. The new, apparently more stable,Read MoreMarket Analysis : Currency Etf1234 Words   |  5 Pagescurrencies including the U.S. Dollars, Canadian dollars, and Mexican peso. Currency ETF s aim to replicate movements in currency in the foreign exchange market by holding currencies either directly or through currency-denominated short-term debt instruments. Launched in 1996 the iShares MSCI Mexico Capped ETF (EWW) is the most popular and common ETF, offering retail investors an immediate approach to gain exposure to an extensive scope of Mexican equities. It tracks the MSCI Mexico IMI 25/50 record. Th isRead MoreSwot Analysis : Latin America1265 Words   |  6 Pagescurrencies including the U.S. dollars, Canadian dollars, and Mexican peso. Currency ETFs aim to replicate movements in currency in the foreign exchange market by holding currencies either directly or through currency-denominated short-term debt instruments. Launched in 1996 the iShares MSCI Mexico Capped ETF (EWW) is the most popular and common ETF, offering retail investors an immediate approach to gain exposure to an extensive scope of Mexican equities. It tracks the MSCI Mexico IMI 25/50 record. This