1994 Mexican Currency Crisis

4565 WordsOct 9, 200819 Pages
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…show more content…
The Mexican Government, in protecting its managed float, lost a further US$11billion in reserves over the following month (Joseph & Whitt 1996). Throughout 1994, Mexico lost significant amounts of reserves trying to stabilise the exchange rate. In 1989 the current account deficit was US$6 billion; by 1991 it had grown to US$15billion, before swelling to approximately US$20billion 1992 and 1993. However, after losing US$1.5billion in reserves over three days in early December 1994, the Government decided to depreciate the Peso by approximately 15%. Within days the Peso plummeted in value as the Government abandoned its new peg, sending the country into the 1994 Mexico financial crisis (Joseph & Whitt 1996). As the Mexican’s government access to the international credit market started to diminish, so did the investors’ confidence in their ability to redeem their investments in government backed Tesobonos bonds. Tesobonos are bonds issued by the Bank of Mexico, marketed predominantly to foreign investors and to be repaid in US$. The dollar denominated bonds which were due to mature in 1995 were unlikely to be repaid in full ($10 billion worth of Tesobonos were to mature in the first quarter of 1995 followed by $19 billion worth before the end of 2005) (JR, 1996 & Arner, n.d). These two factors, the devaluation of the exchange rate in conjunction with the impending default of

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