Currency Crisis In Mexico

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Currency Crisis in Mexico The Mexican financial crisis began from 1994-1995, and it was mainly known as the “Tequila Crisis”. The crisis started after Mexico’s devaluation of the peso in the month of December in 1994. It precipitated as the worst banking crisis in Mexican history, it was the largest depreciation in one year, from being at 5.3 pesos per dollar to increasing to over 10 pesos per dollar. Mexico’s crisis demonstrated that that costs that arise when a country lets its guard down and allows markets to exercise their discipline instead.
We begin to think of all the reasons of why the crisis began. Mexico had weaknesses in economic position at the start of the 1994 that started the growing of the crisis. The external current account
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Using the ISI, the Mexican government instituted a series of policies and regulations to protect domestic industries from international competition. By using this approach, it not only had high import tariffs, but it also had non-tariff barriers on the importation of foreign goods and it provided subsidies to aid the Mexican industries. These countries had no incentive to export manufacturers because they really enjoy having a captive market with no competitors. Mexico continued to run into problems from 1970s to 1980s. The auto manufacturers and maquiladoras companies began operating under the ISI model which did not export much, and it was hard for them to get enough foreign exchange to pay for the imported capital equipment and the intermediate…show more content…
During this year the United States decided to orchestrate a standby loan for Mexico. This idea was to open a line of credit to Mexico big enough that any speculative attack that could further destabilize the peso and the Mexican economy. This line was worth about $50 billion and it was split by many different banks such as: U.S. Treasury ($20 billion), IMF ($18 billion), Bank for International Settlements ($10 billion), and private banks ($3 billion). Mexico did not use all this loan as they only used about $13 billion of it. The loan helped the Mexican economy stabilize. IMF had approved of their loan of February, which was 18-month stand by credit. IMF was able to give $7.8 billion of the loan immediately which I am sure really helped Mexico quickly. Mexico’s arrangement and policy understanding with IMF are $20 billion in swaps and guarantees from the U.S. Exchange Stabilization Fund, and $10 billion of short-term support from the G-10 central banks through the Bank of International Settlements. The IMF arrangement with Mexico was the largest ever approved loan for a member country both from absolute amount and in relation to the country’s quota in the fund.
The IMF’s work in helping to prevent many crises is mainly through exercise of its responsibility of surveillance over international monetary system and members exchange rate policies. IMF surveillance is an international
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