The Origin Of Mexico Financial Crisis

1700 WordsMar 18, 20177 Pages
The origin of Mexico financial crisis In the 1980s, Mexico was undergoing a number of reforms and deregulations that would protect its economy. In 1982, the Mexican government liberalized trade and allowed the international flow of capital into the country so that Mexico can integrate with the developed countries. President Miguel de la Madrid (1982-1988) lifted import tariffs under the General Agreement on Tariffs and Trade (GATT). He also facilitated reforms that welcomed direct foreign investment in the country and the increased growth of country’s financial systems. In addition to that, the economy of Mexico was growing so fast during the early 1990s. Inflation has substantially reduced and Mexico saw many foreign investors flowing and…show more content…
The inadequacy of foreign exchange damaged the Mexican government foreign debt service and thus causing an exchange rate crisis. This exchange rate crisis also caused the country to devalue peg in the 1954,1976 and 1982 as it was unable to pay its debts. In 1979, the United States started to record and monitor the levels of inflation and as such, the interest rates were increased by the Federal Reserve Board to contain it. The central banks in Europe also raised their interest rates. The increase in interest rates caused a rapid fall in commodity prices which perversely affected Mexico’s economy and other developing countries. Due to the combination of the above factors, there was a fall in the income from Mexican exports, a rise in the cost of financing debts that are in foreign currency and exchange rate market pressures. In august 1982 the government of Mexico under the leadership of Jose Lopez Portillo (1976 -1982) put a ban on foreign debt services and started a renegotiation process. The renegotiation was finalized by President Carlos Salinas de Gortari in 1989. The suspension of payments to foreign debts services led to a further increase in interests causing foreign investors to panic and forcing other developing countries in Latin America to also stop making payments on their debts. This led to a financial crisis in many countries and thus asked for financial aid from the world bank and International Monetary Fund. To receive financial
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