1994 Mexican Currency Crisis
The purpose of this report is to analyse the reasons for, the impact of, and the measures taken in response to the Mexican currency crisis of 1994-1995. The first objective is to assess the reasons for the crisis. Why did Mexico, a once immensely desirable investment destination become the bain of the international financial community following December 1994?
The second and chief objective is to assess the impact of the crisis on the foreign exchange and stock markets. The report answers why the crisis adversely affected the Latin American market indices while the US market indices continued to rise.
The third objective is to analyse the measures taken in response to the crisis by the Mexican Government and other international organizations. The key conclusion reached with respect to these three objectives is that the ensuring financial crisis following December 1994 could have been averted. Blame centers on the inadequate response of the Mexican Government and its failure to recognise and act upon the underlying causes of the crisis in a time effective manner. Beginnings of the Mexican Currency Crisis
Several events culminated in the eventuation of the Mexican currency crisis, the first of which occurred on December 20, 1994. This day, widely recognised as beginning of the crisis marked the devaluation of the Peso to the Dollar by Mexican President Ernesto Zedillo by approximately 15% to relieve the pressure on the Peso/Dollar exchange rate. This decision, which was made without consultation with the US Government or the International Monetary Fund, was not accompanied by supporting fiscal or monetary measures to sustain the devaluation.
As a result, between December 20 and 21, $4 billion in foreign reserves was withdrawn from the Mexican economy, leaving only $6 billion remaining in foreign reserves. This resulted in the Mexican Government floating the Peso on 22 December 1994 to prevent further depletion of its foreign reserves.
The second and chief objective is to assess the impact of the crisis on the foreign exchange and stock markets. The report answers why the crisis adversely affected the Latin American market indices while the US market indices continued to rise.
The third objective is to analyse the measures taken in response to the crisis by the Mexican Government and other international organizations. The key conclusion reached with respect to these three objectives is that the ensuring financial crisis following December 1994 could have been averted. Blame centers on the inadequate response of the Mexican Government and its failure to recognise and act upon the underlying causes of the crisis in a time effective manner. Beginnings of the Mexican Currency Crisis
Several events culminated in the eventuation of the Mexican currency crisis, the first of which occurred on December 20, 1994. This day, widely recognised as beginning of the crisis marked the devaluation of the Peso to the Dollar by Mexican President Ernesto Zedillo by approximately 15% to relieve the pressure on the Peso/Dollar exchange rate. This decision, which was made without consultation with the US Government or the International Monetary Fund, was not accompanied by supporting fiscal or monetary measures to sustain the devaluation.
As a result, between December 20 and 21, $4 billion in foreign reserves was withdrawn from the Mexican economy, leaving only $6 billion remaining in foreign reserves. This resulted in the Mexican Government floating the Peso on 22 December 1994 to prevent further depletion of its foreign reserves.
References: Arner, D.W. (October 1996). The Mexican Peso Crisis: Implications for the regulation of financial markets. Retrieved April 28, 2007 from http://iibf.law.smu.edu/arner.pdf Allen, R.E Dale, R. (1995, January 10). The real lesson of Mexico’s crisis. International Herald Tribune. Retrieved 19 May 2007, from http://www.iht.com/articles/1995/01/10/think.php DataStream Advance Eiteman, D.K., Stonehill, A.I, and Moffett, M.H., 2007. Multinational Business Finance, 11th edition Hassan, M.K. & Kilic, O. Tufte, D. (2000). Market efficiency, The Mexican Peso crisis, and the U.S bank stock returns. Global finance journal, Issue 1, pp 73. International Monetary Fund. (1999). International Financial Contagion. Retrieved 29 April 2007 from http://www.imf.org/external/pubs/ft/weo/1999/01/0599ch3.pdf Joseph A Jr, J.A.W. (January/February 1996). Economic Review. The Mexican Peso Crisis. Retrieved April 28, 2007 from http://www.frbatlanta.org/filelegacydocs/J_whi811.pdf Lhost, J Lustig, N. (1998). Mexico: Remaking of an Economy. 2nd Edition. Washington, DC: Brookings Institution Press. Martinez, G.O. (1998). What lessons does the Mexican crisis hold for recovery in Asia. Journal of Finance and Development, Vol 35, Iss 2. McQuillan, L.J. & Montgomery, P.C. (1999). The International Monetary Fund: Financial Medic to the World? Hoover Institution Press Publication; United States of America. Mexican Derivatives Exchange (MexDer) NYSE Euronext. (May, 2007). S&P 500 Index. Retrieved 19 May 2007, from http://www.nyse.com/about/listed/lcddata.html?ticker=SPX_I Sachs, J The World Bank Group. (2000, September 15). Contagion of Financial Crises: Definitions and Causes of Contagion. Retrieved 29 April 2007 from http://www1.worldbank.org/economicpolicy/managing%20volatility/contagion/definitions.html Williamson, J