The Mexican Peso Crisis

2040 Words9 Pages
On December, 1994 the government of Mexico announced the devaluation of its currency which was a surprise to the financial markets. Mexico had followed an “exchange rate policy of maintaining the peso within a well defined band against the US dollar” (Truman,1996.199). As the current account deficit rose this policy had come under pressure. The devaluation on December 20 fail to stabilize peso and two days later was forced to let it float, causing its external value to plummet. In this paper I will analyze the build up leading to the Mexican peso crisis “Tequila crisis” of 1994. Explaining the cause and effect of the crisis as well as the economic and political impact; emphasizing on its interactions with the International Monetary Fund (IMF). To understand the Mexican peso crisis with regard to the domestic economy one must understand the history that led to the crisis. In the 1960s the economy was structured around industrialization. Mexico’s economy maintains rapid growth with manufacturing remaining the country’s dominant growth sector (Urquidi,1987.1). The allure of expanding 7 percent annually was appealing to foreign investors. Mining, trade and agriculture growing a great deal by 1970, Mexico had “diversified its export base becoming self-sufficient in food crops, steel and most consumer goods”. External financing was moderately modest; total interest on external debt was a mere $200 million that “meant allocating it to less than 1 percent of total export goods
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