With the Crimea referendum passed and Russia ready to annex the region, the United States and the European Union have threatened sanctions.
The crisis also affected other emerging economies that were similar to Mexico, in particular South American economies. Since NovemberMexico operated a pegged exchange rate system in which the peso, the currency of Mexico, was initially linked to the U. Inthe peso was devalued by 10 percent, but that devaluation was seen as insufficient, leaving the peso to remain overvalued.
Given the economic and political conditions at that time, the simultaneous management of the foreign exchange rate and the money supply proved to be a difficult balancing act. The same year also saw a time of transition at the helm of Mexico, and the outgoing president was reluctant to devalue the peso during his term of office.
It was feared that allowing the peso to devalue would cause generalized discontent among the population, as it did in the election years of and The issue of allowing interest rates to rise was controversial as well.
First, it would further strengthen an already-overvalued peso.
Second, it would raise the cost of capital to the private sector. To ease the pressure on interest rates, the Central Bank of Mexico expanded credit by loaning more funds to commercial banks and by purchasing government securities held by corporations and the public. With an overvalued peso, it was cheaper for Mexicans to import foreign-made goods and more expensive for foreigners to buy goods made in Mexico.
The overvalued peso led to increased imports and decreased exports, and a widening current account deficit. The political turmoil and social unrest of caused private capital in-flows to dry out.
Hence, foreign exchange reserves were used mainly to finance the deficit, causing Mexico to eventually run out of reserves.
As a result, the Central Bank of Mexico soon ran out of reserves to guarantee deposits in the event of a bank run. The fact that a sizable chunk of total deposits were in dollar-denominations made matters even worse for foreign investors.
In Decemberan auction of government securities to buy time for the Mexican government, hoping the shock would be transitory failed, and that kick-started a wave of panic among investors.
The combination of political instability, an overvalued currency that may be subject to speculative attacks, huge current account deficits, and dwindling foreign exchange reserves overtaking any benefit of Mexico joining the North American Free Trade Agreement [NAFTA] in contributed to its economic collapse.
The Mexican government finally perceived the costs of defending the exchange rate to be too high and had to let the peso devalue. The devaluation led to extreme financial panic. Given that in the Mexican government froze dollar-denominated deposits and paid them back at an exchange rate well below market rate, investors feared that a repeat of that event could occur.
Moreover, fearing a contagion effect, investors pulled out funds from other markets with characteristics similar to Mexico.
If you need a custom essay or research paper on this topic please use our writing services.Mexican Peso Crisis Mexico was forced to devalue peso due to its dwindling foreign exchange reserve.
Due to the ongoing current deficit and capital flight that happened, it became impossible for Mexico to continue to keep the peso fixed in the foreign exchange market.
Mexico is a country located in North America and is bordered by the United States to the north, Belize and Guatemala to its south, the Gulf of Mexico to its east and the North Pacific Ocean to its west. The Mexican Peso Crisis and International Financial Management Introduction With the rapid development of global economy, different countries’ economy has .
The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U.S. dollar in December , which became one of the first international financial crises ignited by capital flight.
THE MEXICAN PESO CRISIS: COMMENT ON MEIGS Robeito Salinas-Leon James Meigs’s () essay constitutes a valuable contribution to the vast literature . The Economic History of Mexico.
The Economic History of Mexico. Richard Salvucci, Trinity University Preface. This article is a brief interpretive survey of some of the major features of the economic history of Mexico from pre-conquest to the present.