Mexican peso crisis

The Mexican peso crisis (also known as the Tequila crisis or December
mistake crisis) was a currency crisis sparked by the Mexican government's
sudden devaluation of the peso against the U.S. dollar in December 1994,
which became one of the first international financial crises ignited by capital
flight.[1]:5052 during the 1994 presidential election, the incumbent
administration embarked on expansionary fiscal and monetary policy.
The Mexican treasury began issuing short-term debt instruments denominated
in domestic currency with a guaranteed repayment in U.S. dollars, attracting
foreign investors. Mexico enjoyed investor confidence and new access to
international capital following its signing of the North American Free Trade
Agreement (NAFTA). However, a violent uprising in the state of Chiapas, as
well as the assassination of the presidential candidate Luis Donaldo Colosio,
resulted in political instability, causing investors to place an increased risk
premium on Mexican assets.
In response, the Mexican central bank intervened in the foreign exchange
markets to maintain the Mexican peso's peg to the U.S. dollar by issuing
dollar-denominated public debt to buy pesos. The peso's strength caused
demand
for
imports
to
increase,
resulting
in
a trade
deficit. Speculators recognized an overvalued peso and capital began flowing
out of Mexico to the United States, increasing downward market pressure on
the peso. Under election pressures, Mexico purchased its own treasury
securities to maintain its money supply and avert rising interest rates, drawing
down the bank's dollar reserves. Supporting the money supply by buying more
dollar-denominated debt while simultaneously honoring such debt depleted
the bank's reserves by the end of 1994.
The central bank devalued the peso on December 20, 1994, and foreign
investors' fear led to an even higher risk premium. To discourage the resulting
capital flight, the bank raised interest rates, but higher costs of
borrowing merely hurt economic growth. Unable to sell new issues of public
debt or efficiently purchase dollars with devalued pesos, Mexico faced
a default. Two days later, the bank allowed the peso to float freely, after which
it
continued
to
depreciate.
The
Mexican
economy
experienced hyperinflation of around 52% and mutual funds began liquidating
Mexican assets as well as emerging market assets in general. The effects
spread to economies in Asia and the rest of Latin America. The United States
organized a $50 billion bailout for Mexico in January 1995, administered by
the IMF with the support of the G7 and Bank for International Settlements. In

the aftermath of the crisis, several of Mexico's banks collapsed amidst

widespread mortgage defaults. The Mexican economy experienced a
severe recession and poverty and unemployment increased

What is the 'Asian Financial Crisis'

The Asian financial crisis, also called the "Asian Contagion," was a series
of currency devaluations and other events that spread through many Asian
markets beginning in the summer of 1997. The currency markets first failed in
Thailand as the result of the government's decision to no longer peg the local
currency to the U.S. dollar (USD). Currency declines spread rapidly
throughout South Asia, in turn causing stock market declines, reduced import
revenues and government upheaval.
BREAKING DOWN 'Asian Financial Crisis'
As a result of the devaluation of Thailand's baht, a large portion of East Asian
currencies fell by as much as 38%. International stocks also declined as much
as 60%. Luckily, the Asian financial crisis was stemmed somewhat by
financial intervention from the International Monetary Fund and the World
Bank. However, the market declines were also felt in the United States,
Europe and Russia as the Asian economies slumped.
As a result of the crisis, many nations adopted protectionist measures to
ensure the stability of their own currencies. Often, this led to heavy buying
of U.S. Treasuries, which are used as global investments by most of the
world's sovereignties. The Asian crisis led to some needed financial and
government reforms in countries such as Thailand, South Korea, Japan and
Indonesia. It also serves as a valuable case study for economists who try to
understand the interwoven markets of today, especially as it relates to currency
trading and national accounts management.
Modern Case of the Asian Financial Crisis
The world markets have fluctuated greatly over the past two years, from the
beginning of 2015 through the second quarter of 2016. This has caused the
Federal Reserve to fear the possibility of a second Asian financial crisis. For
example, China sent a shockwave through equity markets in the United States
on August 24, 2016, when it devalued the yuan in relation to the USD. This

caused the Chinese economy to slow, resulting in lower domestic interest rates
and a large amount of bond float.
The low interest rates enacted by China encouraged other Asian countries to
decrease their own domestic interest rates. Japan, for example, cut its alreadylow short-term interest rates into the negative numbers in early 2016. This
prolonged period of low interest rates forced Japan to borrow increasingly
larger sums of money to invest in global equities markets. The Japanese yen
responded counterintuitively by increasing in value, making Japanese products
more expensive and actually further weakening its economy.