1. The Tequila Crisis The Mexico Peso Crisis
Jinsok Hong

2. Contents Introduction Causes of Crisis Affect on Mexican Economy
Rescue

3. Mexico government’s devaluation of Peso
Introduction
Mexico government’s devaluation of Peso
-Pegged exchange rate system -

4. What caused it? - Political Assassination - Rebellion in Chiapas
Capital
Flights
Presidential
Elections
The Mexican government pegged the Peso to the US dollar. They fixed an upper limit on their desired rate and intervened in the foreign exchange market to make the desired effects. As we can see in the graph the mexican government subdued the devaluation of the peso by buying up pesos that drained the foreign reserves. In March 23, with the assassination of the prominent political and presidential candidate Luis Donaldo Colosio and the prior rebellion in the sourthern province of Chiapas, political stablility of mexico was in question thus forcing the peso to devaluate. The mexican government thus, drained $11 billion in reserves to maintain a target rate, which is refelected on the chart. Later continuous political assinations, breakdown in negotiations in Chiapas and pessimism on refinancing government debt in 1995, further drop in federal reserves was inevitable. In one word, the mexican government went in the brink of bankruptcy.

5. What caused it? High government expenditures Tesobono
Finance short-term deficits
Low risk for holders  High risk for Mexico
The outgoing Mexico adminstartiion’s high spending for the pre-election disposition, to stimulate the economy led to high government deficits. The Salinas administration issued tesobono, which is a type of debt instrument denominated in peso but indexed in dollars. It financed short-term debt through this tesobono, which became one of the sources of the peso crisis. Since the tesobono was indexed in dollars, and the mexican government promised the investors to pay in pesos to protect the dollars invested in, the sales of tesobono rose, and many speculative sharks entered the mexican finanicial market which made mexico vulnerable. Even after the crisis few tesobono holders were heavily affected by the crisis. In the end of 94, foreign reserves for the mexican government was $5billion dollars compared to $23dollars in tesobono liabilities,

6. Devaluation Political Instability Current Account deficit
With the serious of political assassinations, foreign investors had doubts in investing in Mexico. Already with the counrty highly dependent on portfolio investments, rather than F야, capital flights occurred which resulted in the severe devaluation of the Mexican Peso. Already in current account deficit, inflationary pressures and high interest rates that could be forced upon financial intermediaries and debtors, Mexican government decided to abandoned the pegging of the peso, that lead to the plummet of the currency.
December 20th, 1994
Mexican government devalued the Peso

7. Effect on Mexico Mexico Government debt
 Ba2 (Moody’s rating in Dec 23th, 1994)
Economic recession
In 1995, GDP growth -9%
Bad loans exposed
Interest rates soared
The Mexican government debt rating plummeted to a mere Ba2 rating, which is two level below the lowest investment grade. With this rating the Mexico government was able to acquire adequate funds to recover, thus lead to the rescue package from the United States.
Also in the financial sector many banks defaulted as bad loans were exposed. With the soar in interest rates, the middle mexican class was hugely affected by defaulting on their loans, and many had their homes repossessed.

8. The Rescue US IMF $20 billion currency swaps and loan guarantees
$17.7 billion Stand-by Credit Agreement
The United States and the IMF reacted fast to the crisis in mexico. The us agreed on 20 billion dollars worth of currency swaps and loan gurantees and the IMF provided a 17.7 billion sca which is an arrangement with a lender (a group of banks or the IMF in the case of a member country) whereby a fixed amount of credit will be available during a given period, if required. Through these rescues the mexico government was able to rebound fairly rapidly.

9. Characteristics Not insolvent but illiquid Quick recovery
$7.4 billion trade surplus in 1995
Real export 30% higher in 1995
After the rescue package by U.S and NAFTA , IMF proved to be invaluable since the crisis was based on a short-term fixed foreign exchange rate. Therefore replenishing foregin reserves in the mexican economy was the key to the quick recovery of Mexico.

10. Thank You