by Two People With(Out) Cash

The Beginnings of the Crisis The Mexican Peso Crisis began in The Mexican Peso Crisis began in In happened, for the most part, because of a short-term foreign exchange problem that Mexico was having. In happened, for the most part, because of a short-term foreign exchange problem that Mexico was having. Shortly before the crisis, in 1993, North American approved NAFTA (North American Free Trade Agreement), which became the world’s largest free trade agreement and made a good deal of future growth possible for Mexico. Shortly before the crisis, in 1993, North American approved NAFTA (North American Free Trade Agreement), which became the world’s largest free trade agreement and made a good deal of future growth possible for Mexico.

1994: Starting Off with a Bang, Literally! On New Year’s Day in 1994, a radical activist launched a rebellion in Chiapas. On New Year’s Day in 1994, a radical activist launched a rebellion in Chiapas. He had been organizing this rebellion with his group members for many years. He had been organizing this rebellion with his group members for many years. This foreshadowed much of what was to come for Mexico in This foreshadowed much of what was to come for Mexico in A presidential election was scheduled for August A presidential election was scheduled for August Because of much political unrest in Mexico, politics took up most of the time during the campaigning, without much time being used to talk about future economic policy. Because of much political unrest in Mexico, politics took up most of the time during the campaigning, without much time being used to talk about future economic policy.

1994: Starting Off with a Bang, Literally! Miguel Salinas de Gotari, the president at the time, had selected Luis Donaldo Colosio as the candidate of the Party of Institutional Revolution (PRI), the party that had ruled in Mexico for half a century. Miguel Salinas de Gotari, the president at the time, had selected Luis Donaldo Colosio as the candidate of the Party of Institutional Revolution (PRI), the party that had ruled in Mexico for half a century. Colosio was assassinated in March of Colosio was assassinated in March of Ernesto Zedillo was chosen as his successor and was elected in August. Ernesto Zedillo was chosen as his successor and was elected in August.

More Political Troubles In September, one of Zedillo’s cabinet members was assassinated. In September, one of Zedillo’s cabinet members was assassinated. This was seen by foreign investors as the final straw. This was seen by foreign investors as the final straw. With so much political unrest and instability, these investors no longer trusted leaving their money in Mexico, and thus began pulling this money out. With so much political unrest and instability, these investors no longer trusted leaving their money in Mexico, and thus began pulling this money out. Mexico lost $1.5 billion in reserves in a period of three days. Mexico lost $1.5 billion in reserves in a period of three days.

Future Devaluation The outgoing president did not want to devalue the peso while he was still in office, so he left this task for the new president to handle. The outgoing president did not want to devalue the peso while he was still in office, so he left this task for the new president to handle. By the time Zedillo took office, devaluation was completely unavoidable. By the time Zedillo took office, devaluation was completely unavoidable. The fact that the peso remained overvalued for so long scared away foreign investors of Mexican products and encouraged Mexicans to buy foreign products, a double- edged sword for the Mexican economy. The fact that the peso remained overvalued for so long scared away foreign investors of Mexican products and encouraged Mexicans to buy foreign products, a double- edged sword for the Mexican economy. The imminent devaluation encouraged even more foreign investors to convert their pesos into dollar assets. The imminent devaluation encouraged even more foreign investors to convert their pesos into dollar assets.

Supporting Mexican Currency Mexico was forced to support the value of the peso by using up its foreign holdings to buy back pesos. Mexico was forced to support the value of the peso by using up its foreign holdings to buy back pesos. Thus, their foreign reserves were wasted on a currency that was impossible to try to sustain. Thus, their foreign reserves were wasted on a currency that was impossible to try to sustain. Let’s look at some of Mexico’s numbers at this point: Let’s look at some of Mexico’s numbers at this point:

By the Numbers… Year Balance of Trade Current Account Direct Foreign Investment Portfolio Investment Gross International Reserves Total External Debt Public Sector External Debt Interest Payments na12.4

Crisis Resolved Luckily, due to quick response by the U.S. government in providing loans, the crisis was resolved rather quickly. Luckily, due to quick response by the U.S. government in providing loans, the crisis was resolved rather quickly. It could have gone on for a long period of time due to Mexico’s poor condition at the time. It could have gone on for a long period of time due to Mexico’s poor condition at the time. Some of these aid packages were even structured into the NAFTA agreement. Some of these aid packages were even structured into the NAFTA agreement. In the U.S., many policymakers feel that the decision to strongly aid Mexico was a poor choice because Mexico has not become as prosperous as some would have liked. In the U.S., many policymakers feel that the decision to strongly aid Mexico was a poor choice because Mexico has not become as prosperous as some would have liked. However, most think that the choice the U.S. made to assist Mexico was the correct one because as one person put it, “Mexico is not going away” and the U.S. will be better off if Mexico is better off. However, most think that the choice the U.S. made to assist Mexico was the correct one because as one person put it, “Mexico is not going away” and the U.S. will be better off if Mexico is better off.