The Mexican Peso Crisis

3767 WordsApr 3, 201316 Pages
crisisThe 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 December Mistake Bailout & Performance Since Crisis Tequila Effect – Brazil And Argentina Current Situation Conclusion References Pg. No. 3 3 4 6 6 7 8 10 10 11 11 12 13 Page 2 The Mexican Peso Crisis - 1994 INTRODUCTION In the early 1990s the…show more content…
3. The largest form of capital inflow was the purchase of bonds—in many cases, government bonds. Over the five-year period $43 billion came into Mexico for this purpose. A large portion of these securities had short terms, often maturing in one to three months. Of the three forms of capital inflow, this last one probably posed the greatest danger to the exchange rate peg. If anything caused foreign investors to decide to pull out of Mexico (with its quasi-fixed exchange rate), investors could simply have taken their money out of the country as their securities matured, putting tremendous pressure on the government’s reserves within a matter of weeks. STERILIZATION INTERVENTION Even as the current account deficit widened, the growth of Mexico’s reserves reinforced the government’s false sense of security, at least until early 1994. During the period of large capital inflows (1990-93), the central bank accumulated international reserves while reducing domestic credit—that is, peso-denominated loans or grants to the government or the banking system. This policy, called sterilizing, prevents the central Page 6 The Mexican Peso Crisis - 1994 bank’s purchases of international reserves from raising the monetary base and expanding the money supply. To sterilize a capital inflow, the central bank matches its
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