1. The Tequila Crisis (no, not just a shortage)
Micah Brock, Michael Derocher,
Ryan Earley, Annie McDonough,
Matt Warchol

2. Once Upon a Time in Mexico
In the late 1980’s and early 1990’s, Mexico was recovering from economic trouble.
Government Reforms under Carlos Salinas ( )
Restructuring Debt under Brady Plan
Large Reduction in Budget Deficit
Unilateral Cuts in Protectionist Trade Barriers
Privatization of Government Enterprises

3. Everything Looked Wonderful, But…
NAFTA was set to take effect in 1994
Expected to encourage foreign investment in Mexico, due to unique access to the U.S. market.
The reforms came at a price, a growing current account (from $6B in 1989 to $20B in 1993)
The current account hinted at an overvalued peso.

4. Current/Capital Accounts

5. According the to the famed scholar… John Stiver:
Currency Crises usually occur due to a combination of
Bad Policies and
Bad Luck

6. Bad Policies… Overabundance of credit due to:
improved economic expectations
substantial reduction in public debt
real estate and stock market boom
strong private investment
Excessive Credit becomes burden
Poor borrower screening
Credit-volume excesses
Slowdown of economic growth in 1993

7. Bad Policies…
Causes of Debt
Bank reserve requirements eliminated
Banks hastily privatized without regard to “fit and proper criteria” (selection of top officers, shareholders)
Banks purchased without proper capitalization → shareholders leveraged acquisitions with loans provided by very banks bought out or from other reciprocally collaborating institutions
Moral hazard increased because of unlimited backing of bank liabilities
No capitalization rules based on market risk → encouraged asset-liability mismatches which led to highly liquid liability structure
Beginning in December 1990 foreigners allowed to purchase “domestic” (short-term) government debt → increased purchasing power by sellers due to decreased government debt
Implemented “Tesebonos” (short-term, dollar-indexed, peso-denominated Mexican government securities) → effective in short term by retaining $23 billion in foreign financing but magnitude dangerous if devaluation occurred

8. International Reserves

9. Political Events
An argument could be made that the Mexican Peso crisis was the result of “bad luck”
There were 4 major political events the year preceding the crisis

10. 1st Event
Armed guerrilla movement in province of Chiapas in January of ’94

11. 2nd Event
Assassination of ruling party’s presidential candidate, Luis Donaldo Colosio in March of ’94

12. 3rd Event
Kidnapping of Alfredo Harp, a prominent Mexican businessman, in June of ’94

13. 4th Event
Assassination of Jose Francisco Ruiz Massieu, a high ranking official in ruling party in September of ’94
Brother of assassinated Massieu and Deputy Attorney General, Mario Ruiz Massieu, claimed other high ranking officials in ruling party ordered the assassination and that these officials along with the Attorney General (his supervisor) were obstructing his investigation

14. The Result?
The Tequila Crisis !!!

15. Exchange Rates

16. Interest Rates

17. Mexico After the Tequila Crisis
Rapid growth
Exports grow rapidly
Other areas of the economy weak
Credit Problems
Investors unable to get loans from Mexican banks
Inflation Concerns
Fiscal policy vs. monetary policy – inconsistent government behavior raises concerns

18. Conclusions Mexico is rapidly growing Inflation not yet a problem
Government policies have enabled Mexico to partially protect against external shocks

19. Mexico in 2004
High growth driven by strong global economy (especially U.S.) and demand, high commodities prices, rising household consumption and increased investment
Inflation in check
Better distribution of debt, better healthcare, improving infrastructure and decreasing budget deficits enabled largely by favorable world oil prices
Huge gaps between the rich and the poor remain, unemployment rates still high, political and economic stability remains in question

20. Recommendations for Mexico in the future
Take full advantage of the current favorable global economic climate
Continue to strengthen its financial structure and banking systems