Mexican Financial Crisis

1. Mexican Financial Crisis The “Lost Decade” 1980’s and the “Tequila Effect” 1994 By: Keith Aldis

2. 1982 – 1986 Causes • Current Account deficit • Heavy government borrowing of short term loans • Depletion of government foreign reserves • Higher U.S. interest rates due to Volcker's anti-inflation policies • Falling oil-prices • Large capital outflows • Peso devaluation

3. Gross Domestic Product

4. Solutions and lessons • IMF injection of $4.55 billion to keep from defaulting • $3.625 billion from United States to be repaid in 1 year • Long process of stagnation and slow growth for years • Crisis spread throughout most of Latin world

5. 1994 - Causes • Political upheaval, assassination, and loss of confidence • Current account deficit and Capital flight • Peso devaluation • Large amounts of credit flow domestic and foreign • Liberalization of the then privatized financial sector

6. Peso Devaluation

7. Mexican Import and Export

8. Solutions and lessons • $48.8 billion from IMF • $20 billion from U.S. • Loans were repaid rapidly • Mexico quickly recovered and returned to global markets • Spread to other Latin countries did not occur to a great extent • End of crawling pegged exchange rate policy and beginning of floating system

9. Conclusion • Mexico learned to not get itself that position again with a current account deficit and easily retractable capital in-flows. • They learned not to overvalue their currency for fear of another great devaluation and start floating exchange rate policy • Privatized many industries opening them up to foreign markets and reaping the rewards of FDI