The Mexican Peso Crisis Essay

1602 Words7 Pages
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 an
Open Document