Beruflich Dokumente
Kultur Dokumente
Foreign investments
Current account = balance of trade + net factor income (interest, dividends) + net transfer payments (foreign aid)
Current account deficit peso becoming overvalued exports foreign reserves being depleted , imports
http://www.galbithink.org/topics/mex/cad.htm
A fall in domestic savings and a rise in domestic consumption contributed to the current account deficit
http://www.galbithink.org/topics/mex/invest.htm
Real Appreciation & Overvalued Peso Due to policy reforms and NAFTA, a lot of capital ($102 billion from 1990-1994) (1) was flowing into Mexico making the peso appreciate in value. The Mexican government kept the value of the peso within a crawling peg exchange rate with the USD. The exchange rate was controlled within a narrow target band whose upper limit was raised bit by bit for gradual nominal depreciation. But in real, price adjusted terms the peso was appreciating, contributing to the current account deficit
R = Real exchange rate P = Domestic price level (pesos) P* = Foreign price level ($) E = Mkt exchange rate (peso/$) %P = domestic inflation rate %P* = foreign inflation rate
R = P/(P*E)
%R = %P - %P* - %E
In Mexicos case: R
Thus the peso became overvalued, meaning the exchange rate became too high for a sustainable equilibrium in the balance of payments. Higher interest rates (which causes external debt to rise even more) are needed to prop up an overvalued currency until the inevitable devaluation takes place.
Elections
Political Shocks
Elections Because of an upcoming presidential election on August 21, 1994, Mexican authorities were reluctant to take action in the spring and summer of 1994 to fix the inconsistencies in the economy. The choices open to them were to: raise interest rates even more to bring back capital inflow reduce government expenditures to reduce domestic demand, decrease imports and relieve pressure on the peso devalue the peso to make exports more competitive The first two options were unattractive in a presidential election year because they could have led to a significant downturn in economic activity and could have further weakened Mexicos banking system. (PRI wanted to stay in charge). Devaluing the peso would have undermined its commitment to maintaining a stable exchange rate the basis of its success in attracting foreign capital.
In February 1994, the Federal Reserve raised its federal funds rate target because of inflationary pressures.
The Mexican government thought it was only temporary and made no substantial policy changes.
http://www.galbithink.org/topics/mex/uint.htm
Political Shocks The Central Bank blamed a series of assassinations and other discouraging acts that political risk and investor confidence.(2) March 1994 Assassination of presidential candidate Luis Donaldo Colosio Resignation of Minister of the Interior Jorge Carpizo who was overseeing the national election, kidnapping of prominent businessman Alfredo Harp Assassination of High official Jose Francisco Ruiz Massieu Renewed pressure on the peso: Breakdown in talks with Chiapas rebels? Market worries about current account deficit? Leaked rumors of changes in exchange rate policies? Reserves in four weeks $11 billion
June/July 1994
Reserves
$4 billion
$1.5 billion
Shift from cetes tesobonos Banco de Mxico had tried increasing domestic interest rates (from 10.1 % to 17.8% in March) on short-term (91-day), peso-denominated Mexican government bonds (cetes) in an attempt to stem the outflow of capital.
http://www.galbithink.org/topics/mex/pbond.htm
Float and Sink December 20 Mexican authorities sought to relieve pressure on the exchange rate by announcing a widening of the peso/dollar exchange rate band (peso devalued by 15%.) December 20-21 The government did not announce any new fiscal or monetary measures to accompany the devaluation so foreign reserves $4 billion. December 22 Mexican government forced to freely float its currency.
The Mexican Peso Crisis of 1994-95 was now fullblown, and at this point, Mexico was forced to turn to international sources for assistance.
International Effects
Due to the Mexican Peso Crisis most large Western hemisphere Less Developed Countries (LDCs) experienced turbulence in their foreign exchange markets and significant declines in equity markets. For example Argentina and Brazil experienced heavy trading losses after the Crisis. Some of the LDCs experienced discrimination due to the fact that they had some of the same general characteristics as Mexico: 1. low savings rates 2. large current account deficits 3. weak banking systems 4. significant volumes of short term debt
Goals of Assistance
Restore financial stability Strengthen public finances and the banking sector Regain investor confidence Reinforce the groundwork for long-term sustainable growth
3. Tightening monetary/fiscal policy to reduce the demand for all goods 4. Using foreign exchange reserves to cover deficit
Post-Crisis
(1996-Present)
Post-Crisis
(1995-Present)
Post-Crisis Effects
Lingering Side-Effects?
Improvement in Mexican banking
Youth of Banking sector Improvement of regulations Large gap between the rich and poor remains IMF double Emergency Funds
Distribution of Wealth
Financial Institutions
3.3% in 2005
An Expensive Lesson
(1) Arner, Douglas. The Mexican Peso Crisis: Implications for the Regulation of Financial Markets. Essays in International Financial & Economic Law. The London Institute of International Banking, Finance & Development Law, 1996. <http://iibf.law.smu.edu/arner.pdf> (2) Williamson, John. Causes and Consequences of the Mexican Peso Crisis. Institute for International Economics March 14, 1995 http://www.galbithink.org/topics/mex/ps.htm#elections