The Mexican Currency Crisis

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

dollar. This policy served at least three purposes. First, it provided foreign investors with assurance that their investments would not lose value under normal circumstances. Having this confidence bolstered the booming import-export business in Mexico. Second, a fixed exchange rate allowed Mexican firms to borrow money in international markets to finance expansion in preparation for the opening of free trade with the United States in January 1995. Finally, a fixed exchange rate helped the Mexican authorities fight domestic inflation by forcing monetary policy to fluctuate according to balance of payments considerations, not political whims. So, in an open economy with a fixed exchange rate, prices of imports were stable and Mexican products competing with imports had be priced to meet international

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