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The Mexican Peso Crisis of 1994-1995

Whereas the financial crisis in Mexico in 1982 had to do with external debt and took a long time for recovery the peso crisis of 1994 had little to do with external but instead was due to a short-term foreign exchange problem that was handled relatively quickly. In part, this quick recovery was due to the quick response of the U.S. government and the IMF in providing loans or loan guarantees. Some of the financial aid packages were prepared even before the peso crisis occurred as part of the structure associated with the North American Free Trade Alliance (NAFTA).

At the time NAFTA was approved in 1993 the economic future of Mexico looked bright.

As a result of the recovery program from the 1982 financial crisis the Government of Mexico had reduced its deficit even though it had also undertaken many program to alleviate problems of public health and education. Although conditions looked good for Mexico in 1993, 1994 was a very bad year for Mexico in many ways. On New Year's Day a radical activist from Mexico City launched the rebellion in the State of Chiapas which he and his associates had been organizing for a number of years. Chiapas has many problems and many legitimate complains against the central government in Mexico City but probably the last thing the people of Chiapas needed was a leftist rebellion. The more complete story ofChiapas is told elsewhere.

A presidential election was due in August of 1994 and that resulted in political considerations taking precedence over economic policy considerations. The outgoing president, Miguel Salinas de Gotari had selected Luis Donaldo Colosio as the candidate of the Party of Institutional Revolution (PRI) which had dominated the politics of Mexico for more than sixty years. Although he was virtually assured of a victory Colosio started campaigning throughout Mexico. In March Colosio was assassinated. Mexico has had assassinations of politicians before but generally only after they were in office or after they were in office. The last assassination of a major candidate had been in 1928. The assassination of the major candidate before the election creates a political crisis. Ernesto Zedillo, a relatively unknown candidate, was chosen to replace Colosio. Zedillo was elected President of Mexico in August of 1994 without much trouble. Then in September José Francisco Ruiz-Massieu, the Secretary General of the PRI, was assassinated. The world public interpreted Ruiz-Massieu's assassination as evidence of the political instability of Mexico and those with funds invested in Mexico began to withdrawn them. In fact, the assassination of Ruiz-Massieu had to do with vengence within his extended family, but that was not known at the time.

The outgoing president did not want to devalue the peso during his term of office and the devaluation was postponed until it was unavoidable. The attempt to maintain an overvalued peso created economic problems for Mexico in that discouraged foreign buyers from buying Mexican products but it encouraged Mexicans to buy foreign products. Furthermore, those with funds held in Mexico, Mexican and otherwise, could see that a devaluation was likely and began converting their peso assets into dollar assets.

A country supports the value of its currency by using up its hard foreign currency holdings to buy its own currency. Very quickly multibillion dollar reserves can be used up wastefully supporting an exchange rate that cannot be sustained.

Source: http://www.sjsu.edu/faculty/watkins/mexico95.htm

Comments:
Is there any similarities that's on with this nation? Is this a possible outcome to resolve the current debacle??
Read further:
http://www.cbc.ca/history/EPISCONTENTSE1EP16CH1PA4LE.html

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