Mexican Financial Crisis
The “Lost Decade” 1980’s and the “Tequila Effect” 1994
By: Keith Aldis
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

Gross Domestic Product
GDP (millions)
700000
600000
500000
400000
GDP (millions)
300000
200000
100000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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

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

Peso Devaluation
Mexican Import and Export
12000
10000
8000
6000
Exports
Imports
4000
2000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
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

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