Financial Management

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MEXICAN PESO CRISIS

Submitted by:
Shilpi Sharma
Pryanka Khattar
Sakshi Agarwal
Shikha Gupta
Gazal Bohra
Rhythm Chakerverty
Icchant Kapoor
Sushant Kapur
Kanisht   Mahajan

INTRODUCTION
In the early 1990s the Mexican economy seemed healthy. It was growing
again after the “lost decade” of the 1980s, when the 1982 debt crisis
and the 1986 collapse of oil prices sent the economy reeling.

Moreover, inflation was being reduced substantially, foreign investors
were pumping money into the country, and the central bank had accumulated
billions of dollars in reserves. Capping the favorable developments was the proposal to reduce trade barriers with Mexico’s largest trade partner, the United States, through the North American Free Trade Agreement (NAFTA). The agreement eventually took effect at the beginning of 1994. The hard times of the 1980s seemed to be history.

Less than twelve months after NAFTA took effect, Mexico faced economic
disaster. On December 20, 1994, the Mexican government devalued the peso. The financial crisis that followed cut the peso’s value in half, sent inflation soaring, and set off a severe recession in Mexico.

What went wrong? After reviewing the events leading up to the devaluation,
this article examines whether Mexican policy mistakes made devaluation
inevitable. The discussion then considers Mexico’s policy actions during 1994, along with options Mexico did not take. The final section reviews market response to the devaluation and Mexican and U.S. government efforts to cope with its aftermath.

CAUSES

The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis, was triggered by the sudden devaluation of the Mexican peso in the early days of the presidency of Ernesto Zedillo.
The crisis is also known in Spanish as el error de diciembre — The December Mistake a term coined by president Carlos Salinas de Gortari. In the Southern Cone and Brazil, the impact that the Mexican economic crisis had on... [continues]

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