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

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

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

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