For more information
Call 1-800-351-0222
Call 1-800-351-0222
MEXICAN ECONOMIC CRISIS.
Term Paper ID:28092
Essay Subject:
1994 devaluation of peso, debt crisis, causes, remedies, bailout, effects on other countries, foreign investment in emergency economics. 1 Table.... More...
10 Pages / 2250 Words
14 sources, 23 Citations,
APA Format
$40.00
More Papers on This Topic
Paper Abstract:
1994 devaluation of peso, debt crisis, causes, remedies, bailout, effects on other countries, foreign investment in emergency economics. 1 Table.
Paper Introduction:
The Mexican Economic Crisis
The globalization of world markets has had a number of positive and negative effects, including the migration of currency fluctuations across borders (The Economist, 1996a). After the collapse of the peso in late 1994, a panic rattled other emerging markets from Brazil to Thailand, sending shocks into these and other vulnerable markets as well. This raises, according to Edwin M. Truman (1996), broad questions about the international institutional and financial environment. On December 20, 1994, the Mexican government announced the devaluation of its currency, surprising financial markets and precipitating the so-called "Mexican peso crisis." The devaluation came after three years during which Mexico had followed an exchange rate policy of maintaining the peso within a well-defined band against the U.S.
Text of the Paper:
The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper.
Table 1 Chronology of the Mexican Peso Crisis Date EventAugust 1994 Presidential elections are heldSeptember/ No information released on Mexico'sOctober 1994 money supply/reserves, and continuing capital outflowsNovember 1, 1994 Reserves of $17.1 billion announced at Mexican bankers conventionDecember 3, 1994 Unofficial market estimates put reserves at $12.7 billionDecember 2 , 1994 Peso devalued 15 percent from 3.5 to 4. Nitsch, M. It is also clear from thisdiscussion that it is becoming increasingly necessary to incorporate sometype of macroeconomic contra system and currency regulation framework intotrade alliances and other treaty agreements with economic elements. Cole and Kehoe (1996) examined Mexico's situation to gain insightinto factors impacting upon the capacity of a country to pay back its debt. The Mexican case has demonstrated that the availability offoreign savings can lead to excessive borrowing by both the public andprivate sectors. The devaluationof the peso on December 2 failed to stabilize financial markets; as JuanR. While this has often beenpermitted, the post-1982-84 International monetary Fund and World Bankpolicies, which inhibit the capacity of debtor governments to seek thistype of situational relief, work against such a resolution. The management of international monetaryand financial relations during the debt crisis. London: Zed Books, 16-28. Ifgovernment debt is in this interval, which is called the crisis zone, thesize of the zone may be understood as depending upon the average length ofmaturity of government debt. The Mexican peso crisis: impact on NAFTA andemerging markets. The Mexican Economic Crisis The globalization of world markets has had a number of positive andnegative effects, including the migration of currency fluctuations acrossborders (The Economist, 1996a). (1996b). dollars (Adler, 1995).Results of Policy The bailout may have been put into place relatively quickly after thecrisis took place, but the effects of the crisis were immediate and far-reaching. After the Mexican crisis, emergingeconomies with large overseas current-account deficits (such as Hungary andThailand) suddenly appear to be vulnerable and this appearance alone canreduce investors' enthusiasm for these countries. Baron Levin (1997) has noted that though foreign investment hascontinued to flow into the Mexican stock and money markets, analysts havenote hesitated to note that 1996 returns were still well below 1994 levels. Indeed, many Western nations, despite their GDP levels,legitimately find that this transfer (or aid) level is impossible toachieve and maintain (Nitsch, 199 ). Espana (1995) notes that in January1995, at the Summit of the Americas, in Miami, President Clinton and otherCentral and South American chiefs of state committed themselves in theoryto the goal of creating a Western Hemisphere Free Trade Area by the year2 5. NP/$ (Adler, 1995, p. Assessment of continued capital flows to developing countries and the debt positions of those countries vis- a-vis Mexico. There are lingering questions as to how the Mexican crisis willimpact upon NAFTA's future evolution. (1997). Euromoney, 324, 32-33. On December 2 ,1994, the Mexican government announced the devaluation of its currency,surprising financial markets and precipitating the so-called "Mexican pesocrisis." The devaluation came after three years during which Mexico hadfollowed an exchange rate policy of maintaining the peso within a well-defined band against the U.S. 2. Anonymous. After the quake." The Economist,343, S18-S25. (1987). Espana, Juan. They posit adverse domestic political andexternal economic shocks, an unsustainable external position, and domesticpolicy slippages as conditions which are directly linked to this type ofcurrency crisis (Truman, 1996). Altvater and Hubner (199 ) have pointed out thatinternal economic crises directly impact upon the capacity of any debtornation to repay its debt. Investment flowing back." Business Mexico, 7(4),24-25. This issue can also be understood in the context of the role of theNorth American Free Trade Alliance (NAFTA). Manfred Nitsch (199 ) states that to understand the dynamics and thecourse of the present international debt crisis it is vital to bear in mindthe role of "Official Development Assistant" (ODA) alongside such factorsand variables as: the currency implications of the debtor nation'sinability to pay and of short-term liquidity: the banks' commercial private-sector financial loans; and the loans extended cheaply, although virtuallywithout a grant element, by the World Bank and the regional developmentbanks. Grant, G. Financial innovations or thevarious new markets within the world monetary markets, are a cause ofconcern not only to the central banks. During 1994, thispolicy had come under pressure as the Mexican current deficit rose to about$29 billion (or 8 percent of Mexico's gross domestic product [GDP]).Mexico's international reserves declined about two-thirds, and thegovernment of Mexico issued more than $25 billion of peso-dominated short-term debt whose face value was indexed to the U.S. Truman (1996) has stated that it was because ofglobalization that these effects took place. (1996). Vasquez, I. In Mexico, the positiveexpectations created by NAFTA stimulated large capital flows, especially inthe form of portfolio investment (i.e., the purchase of Mexican stocks andbonds). Anonymous. The development of macroeconomic programs and policies which regulate internal debt and borrowing activities among the potential member nations. Excessive borrowing - in the form of both "hard" and "soft" bankloans - is but one of the factors fostering the international debt crisis.Elmar Altvater and Kurt Hubner (199 ) state that instability is not createdsolely through debtors' suspending payments, but also by the way the crisisis managed by the private banks themselves. A self-fulfilling model.Journal of International Economics, 41(3-4), 3 9 -33 . Eds. The causes and courseof the international debt crisis." In The Poverty of Nations. 4. Benefits &Compensation International, 24(7), 8-13. Analyses of continued currency fluctuations in Mexico and other countries in the region, along with recovery analysis. Thorp and Whitehead (1987) have described the IMF austerity plan as a"short-term, patchwork, and anti-developmental" effort that has forceddebtor nations (including Brazil, Argentina, and Chile) to agree tounmeetable repayment schedules, retrenchment in vital areas impacting notonly on quality of life but often on basic subsistence for the most poorand vulnerable, and to plans that are then abandoned. Mexico's devaluation. dollar (Truman, 1996). Additionally, as Michael Adler (1995)states, few in Mexico or the United States properly interpreted theultimate consequences for Mexico and other emerging markets. Many nations' inabilityto pay their debts can be traced back to the U.S.'s attempt to crowd outher competitors from the international credit markets. (199 ). The intensification of competitionat the global and regional levels adds to the debt crisis and renders theinterlocking systems within which debt is positioned very fragile. Thorp, R., and Whitehead, L. Because of the linkages ofthese emerging markets, capital overflows are becoming more and morecommonplace. The International Monetary Fund (IMF) refused to pursue astrategy of reducing a burden which is intolerable for these poor nations.In order to recover the loans extended by the international banks andthereby avert crises in the credit system, debtor nations have been offeredprograms which amount to no more than a continuation of the transfer.Additionally, as Altvater and Hubner (199 ) point out, we cannot ignore thefact that the United States, the supreme leader of the world system, hasherself become a debtor nation of the first order. Espana (1995) has noted, the resulting crisis was unduly severe due toseveral factors, including the following: - An immediate and well-organized public relations effort by Mexico's financial authorities would have, had it been forthcoming, greatly contributed to calming the fears of institutional and individual investors, reducing the extent of the inevitable outflows of capital, and fostering Mexican credibility; - An unfortunate delay by Mexico's economic team in presenting a comprehensive and credible contingency plan contributed to the crisis; - Finally, lack of clarity and resolve on the part of the US administration contributed to aggravating the crisis further.Remedies Espana (1995) notes that mistakes in dealing with the crisisinevitably and unnecessarily aggravated its impact and its duration. Business Economics, 3 (3), 45-49. Adler (1995)believes that these development will, in the end, also benefit the emergingeconomies as they will be forced to adopt sustainable economic policies,particularly in relation to their foreign exchange rate, but also inrelation to the role of foreign versus domestic savings in their economicdevelopment. (1995). Federal ReserveBulletin, 82(3), 199-2 9. These are: 1. In The Poverty of Nations. The Mexican peso crisis. The Brady Plan. These analysts believe that it may benecessary for international lenders to recognize that debt repurchases maybe needed if debt crises are to be avoided. 3. Chile's banks remained virtually unscathed during the pesocrisis and after its own bank crisis in the 198 s, because it had pushedthrough a clutch of reforms that stabilized the economy, strengthened thebanks' balance sheets, and established a reputation for tough supervision.Argentina, on the other hand, was significantly less fortunate because atthe time of the crisis, it had to contend with the structures of its ownconvertabilty law and an unreformed regulatory framework.Was Confidence Re-Established? The creation of some sort of trade association between NAFTA and the EU. (1995). 113)The floating of the peso had the effect of further reducing thecreditability of Mexico's monetary policy. The ColumbiaJournal of World Business, 3 , 112- 13 . Espana (1995) has also noted that the result wasa high percentage of high performing loans which negatively affected thebalance sheet of many Mexican banks. Instatements issued by the United Nations (UN) on the subject of thedevelopment decades since 1961, the organization accepts a figure of .7percent of the industrialized nations' Gross Domestic Product (GDP) as atarget net transfer (after deducting repayments) in the form of foreignaid, although the majority of Western nations have set no date for reachingthe target. Levin, B. These markets, onceregarded as golden opportunities for speculative capital investment, arenow being regarded more cautiously; specifically, more careful monitoringof macroeconomic conditions of these markets is regarded as indispensablein order to avid the excessive optimism of the past and a repetition of theMexican case.The International Monetary Fund The IMF and the Bank for International Settlements have been faultedfor failing to warn of the impending crisis in Mexico (Adler, 1995).Different plans are being set up to develop more effective monitoringcapacities in these markets and to create some sort of internationallyfunded facility that would provide quick and efficient assistance tocountries facing a liquidity crisis such as that of Mexico. new pesos per dollar (NP/$)December 23, 1994 Peso allowed to float with reserves in the $5 billion to $6 billion rangeJanuary 3 , 1995 Banxico announced reserves as low as $3.8 billion with the peso trading between 5.5 to 6. London:Zed Books, 3-15. (1996). Espana (1995) considers that the availability of foreign capitalpromoted excessive borrowing by both the public and private sectors. As badas the Mexican situation was, analysts tend to believe that it could havebeen far worse and that only speedy action obviated the worst of thecontagion effects and fallouts. Cole, H.L., and Kehoe, T.J. Fears of a default were raised in theAmerican Congressional debate that called the possibility of any U.S.support into question. Latin American Debt andthe Adjustment Crisis. Eachnation's debt crisis has a variety of causes, some of which are rooted innational politics. Altvater, E. The Czech crown." Euromoney, 324, 16-17. (1996a). They argue that there is a crucial interval of debt for which agovernment, although it finds it optimal to repay old debt if it can sellnew debt, finds "more optimal" to default if it cannot sell new debt. The IMF'sjustification for its various "Extended Fund" agreements in which austeritymeasures predominate is that after a sufficiently rigorous short-termadjustment policy, the typical heavily indebted nation would once againbecome "creditworthy," voluntary lending would resume, and furtherinstallments of Fund-administered austerity would become unnecessary (Thorpand Whitehead, 1987). Are crashes catching?" The Economist.34 , 64. NAFTAhas necessitated de facto monetary cooperation between the US and Mexicothough NAFTA does not contemplate any type of financial assistance similarto that offered by members of the European Union (EU). dollar. As Gavin Grant (1995) suggests, investing in Latin America in generaland in other areas of the emerging world continues to be regarded asattractive by those individuals and institutions investing in Brady bonds.Long-term rather than short-term investors remain encouraged about theprofitability of these markets. Theeffects on Mexico were immediate and severe; an economic contraction at a 5percent rate took place in the first half of 1995, and the Mexican bankingsector suffered under the combined effects of a recession and the extremelyhigh interest rates imposed after the devaluation as an incentive toattract foreign savings. Nevertheless, President Clinton provided anemergency $2 billion rescue package under which Mexico was able to redeemall maturing Tesobonos whose peso proceeds are presented for conversioninto U.S. Edwin M. Cato Journal, 16(2), 233-243.----------------------- 13 The International Monetary Fund (IMF) has listed three majorviews regarding these events. Venezuela. The following table presents a chronology of the critical eventswhich took place during the 1994 crisis. In Mexico, for example, the government has set up nofewer than ten separate programs aimed at helping banks and debtors back ontheir feet. Thus, what emerges fromthe foregoing discussion is a realization that while US and IMFintervention did assist in rectifying some of the worst artifacts of the1994 crisis, capital investors remain cautious with respect to Mexico andother countries in the emerging world. (1995). Between 198 and 1985 alone, the amount of moneyneeded to service the debts of many countries amounted to almost US$5 billion. After the collapse of the peso in late1994, a panic rattled other emerging markets from Brazil to Thailand,sending shocks into these and other vulnerable markets as well. and Hubner, K. (199 ). The market was as of April 1997, still 85 percent below the historic highof US $22.4 billion it reached in January 1994. In this same context, Espana (1995) has documented the effects of theMexican peso crisis on other countries, particularly on emerging markets.The so-called "Tequila effect' was felt not only in Latin Americaneconomies such as Brazil and Argentina, but also in distant markets such asThailand and the Czech Republic. In general, a closer scrutiny of the risk-return trade-offs of portfolio investments in developing economies hasreplaced the exuberant approach of the precrisis era. (1996). Trade agreements suchas those signed by the Group of Three (Mexico, Colombia, and Venezuela) andthe Central American Common Market (Mercomun) have also indicated aninterest in participating in such an alliance. Anonymous. Truman (1996), broad questions about theinternational institutional and financial environment. Investing in Latin America. (1996). Pittsburgh: University of Pittsburgh Press. Thisraises, according to Edwin M. Matthew Valencia (1997) has stated that one artifact of this crisisis the development of banking reforms in emerging countries, includingMexico and Argentina. Valencia, M. ODA ranges, says Nitsch (199 ), from straight grants in the form ofsoft loans extended under quasi-commercial terms, and from export creditguarantees, investment incentives and mixed financing (commercial and ODAloans for the same project) to hard bank loans and direct investment. Nonetheless, the USgovernment put together the largest financial packages ever contributed bythe US to any country, including the largest credit line ever madeavailable by the IMF to a single country. (1997). Adler (1995) states thatconfidence plummeted to the point where $28 billion of outstandingTesobonos ($-indexed government bonds issues in pesos with maturities of upto one year), half of which were held by foreigners, were perceived as asource of potential Mexican default. References Adler, M. M. It was in the best interest ofboth the US and the IMF to undertake such a step which also tends tounderscore the importance of macroeconomic cooperation and coordinationamong trade partners. Enthusiasm for this idea is widespread, especially within Mercosur,the common market association linking Brazil, Argentina, Paraguay, andUruguay. Truman, E. It is also popular within the Andean Pact, a customs unioncomprising Colombia, Venezuela, Peru, and Bolivia. Whether or not these planscome to fruition depends in large measure, according to Espana (1995) uponseveral important concerns.
If this paper is not what you are looking for, you can search again:
or
We can write a Custom Essay just for you.
Browse Essays by Subject