The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis, was triggered by the sudden devaluation of the Mexican peso in the early days of the presidency of Ernesto Zedillo. A week or so of intense currency crisis was stabilized when US President Bill Clinton granted Mexico a $50 billion loan. Devaluation is a reduction in the value of a currency. ... The peso is the currency of Mexico. ... Term of office: 1 December 1994 – 1 December 2000 Preceded by: Carlos Salinas de Gortari Succeeded by: Vicente Fox Quesada Date of birth: 27 December 1951 Place of birth: Mexico City Profession: Economist First Lady: Nilda Patricia Velasco Political Party: PRI Ernesto Zedillo Ponce de León was President of... A currency crisis (also known as a financial crisis) occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. ... United States is the current Good Article Collaboration of the week! Please help to improve this article to the highest of standards. ... The presidential seal was used by President Hayes in 1880 and last modified in 1969 by adding the 50th star for Hawaii. ... William Jefferson Bill Clinton (born William Jefferson Blythe III on August 19, 1946) was the 42nd President of the United States, serving from 1993 to 2001. ... ISO 4217 Code USD User(s) the United States, the British Virgin Islands, East Timor, Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, Panama, Turks and Caicos Islands, and the insular areas of the United States Inflation 3. ...

The crisis is known in Spanish as el error de diciembre — "The December Mistake." In the Southern Cone and Brazil, the impact that the Mexican economic crisis had on the region was labeled the Tequila Effect (Spanish: Efecto Tequila, Portuguese: Efeito Tequila). Map that frames the area named Southern Cone The term Southern Cone (Spanish: Cono Sur, Portuguese: Cone Sul) refers to a geographic region composed of the southernmost areas of South America. ...

Causes of the economic crisis of 1994

While the crisis took place under President Zedillo, the causes are usually attributed to Carlos Salinas de Gortari's outgoing administration. Salinas de Gortari partly coined the term "December Mistake" when he stated in an interview that Zedillo's sudden reversal of the former administrative policies of tight currency controls was "a mistake." It must be mentioned that Salinas de Gortari's popularity and credibility at the time was still high; even though his government's currency policy put an unbelievable strain on the nation's finances, the resulting economic bubble gave Mexico a prosperity not seen in a generation. This period of rapid growth coupled with low inflation prompted some political thinkers and the media to state that "Mexico was on the verge of becoming a First World nation.", and in fact, it was the first of the "newly industrialized nations" to be admitted into the OECD in May, 1994. It was a known fact that the peso was overvalued (by at least 20%, according to some sources), but the extent of the Mexican economy's vulnerability was either not well-known or downplayed by Salinas de Gortari's tame políticos and media. Nonetheless this vulnerability was further aggravated by several unexpected events and macroeconomic mistakes of his administration. Carlos Salinas de Gortari (born April 3, 1948) was President of Mexico from 1988 to 1994. ... The terms First World, Second World, and Third World were used to divide the nations of Earth into three broad categories. ... The Organization for Economic Co-operation and Development (OECD) is an international organization of those developed countries that accept the principles of representative democracy and a free market economy. ... 1994 (MCMXCIV) was a common year starting on Saturday of the Gregorian calendar, and was designated as the International Year of the Family and the International Year of the Sport and the Olympic Ideal by United Nations. ...

Amongst several economists and historians, Hufbauer and Schoot (2005) have commented on several events in 1994, and the macroeconomic policy mistakes that precipitated the crisis: 1994 (MCMXCIV) was a common year starting on Saturday of the Gregorian calendar, and was designated as the International Year of the Family and the International Year of the Sport and the Olympic Ideal by United Nations. ...

• 1994 was the last year of the sexenio or 6-year administration of Carlos Salinas de Gortari who, following the PRI tradition on every election year, launched an amazingly high spending splurge, which translated into a historical high deficit
• In order to finance the historical deficit (a 7% of GDP current account deficit) Salinas issued the Tesobonos, an attractive type of debt instrument that was denominated in pesos but indexed to dollars
• Mexico experienced (common to those days) lax banking or corrupt practices; moreover, some members of the Salinas' family (though only his brother, Raúl, was imprisoned) collected enormous illicit payoffs
• The most-likely-to-win candidate, Luis Donaldo Colosio, was assassinated in March of that year; a couple of months later José Francisco Ruiz Massieu, in charge of the investigation, was assassinated as well
• The EZLN, an insurgent rebellion, officially declared war on the government in 1 January; even though the armed conflict ended two weeks later, the grievances and petitions remained a cause of concern, especially amongst some investors.

All of these, and the increasing current account deficit fostered by consumer binding and government spending, caused alarm amongst savvy investors that had bought the tesobonos, mainly Mexican and a few foreigners, who sold them rapidly, depleting the already low central bank reserves. The economically orthodox thing to do, in order to maintain the fixed exchange rate functioning (at 3.3 pesos per dollar, within a variation band), would have been to sharply increase interest rates by allowing the monetary base to shrink, as dollars were being withdrawn from the reserves (Hufbauer & Schott, 2005). Given the fact that it was an election year, whose outcome might have changed as a result of a pre-election-day economic downturn, Banco de Mexico decided to buy Mexican Treasury Securities in order to maintain the monetary base, and thus the interest rates from rising. This, in turn, caused an even more dramatic decline in the dollar reserves. These decisions aggravated the already delicate situation, to a point in which the crisis became inevitable and devaluation was only one of many necessary adjustments. Nonetheless, nothing was done during the last 5 months of Salinas administration even after the elections were held in July of that year. Some critics presume this was done in order to maintain Salinas popularity who has seeking international support to become director general of the WTO. Zedillo took office on 1 December 1994. Carlos Salinas de Gortari (born April 3, 1948) was President of Mexico from 1988 to 1994. ... Luis Donaldo Colosio Murrieta (10 February 1950 – 23 March 1994) was a Mexican politician who was assassinated during a stop on his presidential campaign. ... José Francisco Ruiz Massieu (1946 – 28 September 1994) was a Mexican political figure. ... The Zapatista Army of National Liberation (Ejército Zapatista de Liberación Nacional, EZLN) is an armed revolutionary group based in Chiapas, one of the poorest states of Mexico. ... January 1 is the first day of the calendar year in both the Julian and Gregorian calendars. ... For other uses of the initials WTO, see WTO (disambiguation). ... December 1 is the 335th (in leap years the 336th) day of the year in the Gregorian calendar. ... 1994 (MCMXCIV) was a common year starting on Saturday of the Gregorian calendar, and was designated as the International Year of the Family and the International Year of the Sport and the Olympic Ideal by United Nations. ...

A few days after a private meeting with major Mexican entrepreneurs in which his administration asked them for their opinion of a planned devaluation, Zedillo suddenly announced his government would let the fixed rate band increase to 15 percent (up to 4 pesos per US dollar), by stopping the previous administration's unorthodox measures to keep it at the previous fixed level (by selling dollars, assuming debt, and so on). It was no longer possible to maintain the previous fixed rate as reserves were on the brink of depletion (having hit a record low of merely 9 billion). This measure, however, was not enough. The government, being unable even to hold this line, decided to let it float. While experts agree that a devaluation was necessary, some critics of Zedillo's incumbent 22-day-old administration, argue that although economically coherent, the way it was handled was politically incorrect. By having announced its plans for devaluation, they argue that many foreigners withdrew their investments, thus aggravating the effects. Whether the effects were aggravated further or not, the result was that the peso crashed under a floating regime from four pesos to the dollar (with the previous increase of 15%) to 7.2 to the dollar in the space of a week. ISO 4217 Code USD User(s) the United States, the British Virgin Islands, East Timor, Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, Panama, Turks and Caicos Islands, and the insular areas of the United States Inflation 3. ...

The United States intervened rapidly, first by buying pesos in the open market, and then by granting assistance of $50 billion that same year. [See the following section for a more detailed explanation.] The dollar then stabilized at the rate of 6 pesos per dollar and, for the next two years, before being affected by the Asian Crisis in 1998, remained around 7 to 7.7 pesos per dollar. 1998 (MCMXCVIII) was a common year starting on Thursday of the Gregorian calendar, and was designated the International Year of the Ocean. ...

Having to comply with the recently signed NAFTA obligations, Mexico did not resort to the traditional Latin American policies in times of crisis of trade protection and capital controls (which might have prolonged the crisis), but introduced strict controls on monetary and fiscal policy, open trade, and devalued currency. The boom in exports that followed eased the recession which turned out to be a 10-month, short-lived recession. By 1996, the economy was already growing (and peaked at 7% growth in 1999). In 1997, Mexico repaid, ahead of schedule, all US Treasury loans. Nafta or NAFTA may refer to: an acronym for the North American Free Trade Agreement an acronym for the New Zealand Australia Free Trade Agreement the town/Tokyo of Nafta, Tunisia This is a disambiguation page: a list of articles associated with the same title. ... 1996 (MCMXCVI) was a leap year starting on Monday of the Gregorian calendar, and was designated the International Year for the Eradication of Poverty. ... 1999 (MCMXCIX) was a common year starting on Friday, and was designated the International Year of Old Farts by the Sometimes-United Nations. ... 1997 (MCMXCVII) was a common year starting on Wednesday of the Gregorian calendar. ...

Financial assistance package

Mexican reserves continued to decrease into January 1995, raising the possibilities of peso inconvertibility, and international debt default. In view of the effects on Mexico's trading partners and the loss of confidence in Latin American economies in general, the IMF, the U.S. Government, and the Bank for International Settlements promised loans and guarantees to Mexico totalling almost $50 billion. The International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance when requested. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... BIS Headquarters in Basel The Bank for International Settlements (or BIS) is an international organization of central banks which exists to foster cooperation among central banks and other agencies in pursuit of monetary and financial stability. It carries out its work through subcommittees, the secretariats it hosts, and through its...

Contributions were as follows:

• The United States arranged currency swaps and loan guarantees with a $20 billion total value.
• The IMF promised an 18 month Stand-by Credit Agreement of around US $17.7 billion.
• The Bank for International Settlements offered a $10 billion line of credit.
• The Bank of Canada offered short term swaps with a US dollar value of around one billion.

The United States' assistance was provided via the treasury's Exchange Stabilization Fund. This was a slightly controversial decision, as President Clinton had already tried and failed to pass the Mexican Stabilization Act through congress. However, use of the ESF allowed the provision of funds without the approval of the legislative branch. The United States Department of the Treasury is a Cabinet department and the treasury of the United States government. ... The Exchange Stabilization Fund (ESF) is a branch of the United States Treasury Department which manages a portfolio of domestic and foreign currencies for the purpose of foreign exchange intervention. ... William Jefferson Bill Clinton (born William Jefferson Blythe III on August 19, 1946) was the 42nd President of the United States, serving from 1993 to 2001. ... Congress in Joint Session. ...

Effects of the economic crisis of 1994

Mexican businesses with debts to be paid in dollars, or that relied on supplies bought from the USA, suffered an immediate hit, with mass industrial lay-offs and several well-publicized suicides. Businesses whose executives attended the meeting at Zedillo's office were spared the nightmare — forewarned, they quickly bought dollars and renegotiated their contracts into pesos. To make matters worse, the devaluation announcement was made mid-week, on a Wednesday, and for the remainder of the week foreign investors fled the Mexican market without any government action to prevent or discourage it until the following Monday when it was too late.

The December Mistake caused so much outrage that Salinas exiled himself in Ireland (he was campaigning worldwide for WTO head at the time). Although the country's GDP contracted approx. 7% in 1995-- the worst decline in the country's history in a single year-- The incident also served to make it clear that his influence (if any) on the Zedillo administration was over. The World Trade Organization (WTO, French: Organisation mondiale du commerce) is an international, multilateral organization, which sets the rules for the global trading system and resolves disputes between its member states; all of whom are signatories to its approximately 30 agreements. ...

See also

• Economy of Mexico
• GDP of Mexico
• Mexico
• North American Free Trade Agreement

// Mexico has a free market economy that recently entered the trillion dollar class. ... // Sectors The official statistics (INEGI) include separate information for 9 sectors. ... Map of NAFTA President Clinton signs the agreement. ...

References

• HUFBAUER GC, J Schott, NAFTA Revisited: Achievements and Challenges, Institute for International Economics, Washington DC, October, 2005

External links

• The Mexican Economy 1996: Finanical Assistance Package - Annual report of the Banco de México
• The Post-Nafta Mexican Peso Crisis: Bailout or Aid? Isolationism or Globalization? by Brett M. Humphrey