The Mexican Peso Crisis

Topics: International economics, Macroeconomics, Investment Pages: 4 (1081 words) Published: November 18, 2013
The Mexican Peso Crisis and International Financial Management 1.0 Introduction
With the rapid development of global economy, different countries’ economy has more and more connection with each other. Imports and exports, current account and capital account, exchange rate system and many other items institute the content of international financial management. Based on the case of the Mexican Peso Crisis in 1994, this paper will detail the reasons and summarize the lessons of the event. Moreover, this paper will analyze the implications of the event on international financial management.

2.0 Original sin of the Mexican Peso Crisis
On December 20, 1994, the Mexican government announced a plan to devalue the peso against the dollar by 14 percent. The debt of Mexico was dollar, which meant the original sin. Because the peso was devalued against the dollar, Mexicans needed to give back more money to Americans, which triggered the financial crisis.

The fuse of Mexican Peso Crisis is peso devaluation. However, currency devaluation does not necessarily lead to financial crisis. For example, peso devaluation respectively in 1954 and 1976 did not lead to financial crisis. Why the peso devaluation in 1994 leaded to financial crisis? In summary, the three reasons are as follows:

First, after the 1980s, the Mexican government sharply increased imports, and then the current account deficit accordingly increased. However, the capital used to keep capital account surplus was short-term foreign capital, which was hot money with strong speculation and mobility. Meanwhile, a large inflow of hot money to make up for the current account deficit, made the overvalue of the peso, and then increased the current account deficit.

Second, after the 1980s, the Mexican government made inflation control as the main policy objectives, in order to attract foreign investment, because the low inflation could make foreign investors correctly judge the market. The Mexican government...
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