1994 economic crisis in Mexico
From Freepedia
The 1994 economic crisis in Mexico was an economic crisis that happened in December 1994 in Mexico. The crisis was triggered by the sudden devaluation of the peso in the early days of the presidency of Ernesto Zedillo. A week or so of intense currency crisis was stabilized when US President Bill Clinton decided to grant Mexico a loan to bail the country out, to the tune of US $50 billion.
The crisis is known in Spanish as el error de diciembre — "The December Mistake". In the Southern Cone and Brazil, the impact that the Mexican economic crisis had on the region was labeled the "Tequila Effect" (Spanish: Efecto Tequila, Portuguese: Efeito Tequila).
Causes of the Economic Crisis of 1994
While it took place under President Zedillo, and much of the disastrous impact can be traced back to that administration's cronyism and mismanagement of the devaluation, the blame for the underlying causes is usually placed with the outgoing administration of Carlos Salinas de Gortari, who partly coined the term when he replied in an interview that he believed that Zedillo's sudden reversal of the former presidency's policies of tight currency controls was "a mistake." It must be mentioned that Salinas de Gortari's popularity and credibility at the time was still high; even though his government's currency policy put an unbelievable strain on the nation's finances, the resulting economic bubble gave Mexico a prosperity not seen in a generation. This period of rapid growth coupled with low inflation prompted some political thinkers and the media to state that "Mexico was on the verge of becoming a First World nation." It was a known fact that the peso was overvalued (by at least 20%, according to some sources), but the extent of the Mexican economy's vulnerability was either not well-known, or downplayed by Salinas de Gortari's tame politicos and media.
While experts agree that a devaluation was necessary, they also tend to concur that the way the government handled it was politically inept: A few days after a private meeting with major Mexican entrepreneurs in which his administration asked them for their opinion of a planned devaluation, Zedillo suddenly announced his government would let the peso exchange rate float freely against the US dollar, by stopping government measures to keep it at a fixed level (by selling dollars, assuming debt, and so on). That resulted in the peso crashing from three pesos to the dollar to ten to the dollar in the space of a week (although in the interim dollars were selling for up to 30 pesos in some regions).
Effects of the Economic Crisis of 1994
Mexican businesses with debts to be paid in dollars, or that relied on supplies bought from the USA, suffered an immediate hit, with mass industrial lay-offs and several well-publicized suicides. Businesses whose executives attended the meeting at Zedillo's office were spared the nightmare — forewarned, they quickly bought dollars and renegotiated their contracts into pesos. To make matters worse, the devaluation announcement was made mid-week, on a Wednesday, and for the remainder of the week foreign investors fled the Mexican market without any government action to prevent or discourage it until following Monday when it was too late.
The December Mistake caused so much outrage that for a long time, Salinas did not dare return to Mexico (he was campaigning worldwide for WTO head at the time). The incident also served to make it clear that his influence (if any) on the Zedillo administration was over.
