Mexican Peso crisis

In 1994 Mexican Peso crisis occur due to devaluation of Mexican peso against us dollar by

14 %.

US Dollar v/s MEICAN peso exchange rate (nov/94 - jan/95)

Cause of the crises : • lax monetary policy pursued in 1994• over-valued exchange rate of peso • the large scale of the current account deficit,

which had reached almost 8% of GDP in 1993 and 1994

• high proportion of government debt paper was so short-term &high portion of this in non- residents

• Political causes

Why did the devaluation of the

Mexican peso turn into a financial crisis?

Impacts of crisis :

• Peso crisis rapidly spill over to Latin American and Asian financial markets

• Most of fund manger liquidated funds due to fear of loosing investments

• Foreign reserves fall down drastically • in 1995 alone, prices rose 35 %and output fell

6.2 %• Mexico’s per capita GDP fell by 5 per cent

during the crisis

Bail out from crisis :

financial packages of • US$ 50 billion composed of loans from the U.S.

(US$20 billion), • the IMF ($17.8 billion)• the Bank of International Settlements (US$10

billion)• Canada (1 billion of Canadian dollars) • Group of Latin American countries (1 billion

dollars)

Goals of Assistance:

• Restore financial stability • Strengthen public finances and the banking

sector• Regain investor confidence• Reinforce the groundwork for long-term

sustainable growth

Lessons from peso crisis :

• It is essential to have multi national safety net to safe guard the world financial system from these type of crisis .

• Mexico excessively depended on the foreign capital to finance its economic development this policy has its own undesirable effects

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