Mexican Tequila Crisis

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Mexican Tequila Crisis

• Steven Seperson Jon Zornow

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Summary

• Week of December 20 1994 -- sudden devaluation
  of the Mexican peso under Pres. Ernesto Zedillo
• Crisis stabilized when Pres. Bill Clinton granted
  Mexico 50 billion loan
• Crisis labeled Tequila Effect in Southern
  Cone and Brazil
• Crisis known as el error de diciembre The
  December Mistake

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Causes
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Causes

• Boy meets girl.

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Causes

• Boy meets girl.
• Boy finds girl to be an attractive investment.

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Causes

• Boy meets girl.
• Boy finds girl to be an attractive investment.
• Boy lends girl 16B.

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Causes

• Boy meets girl.
• Boy finds girl to be an attractive investment.
• Boy lends girl 16B.
• Boy pulls out.

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Causes

• Boy meets girl.
• Boy finds girl to be an attractive investment.
• Boy lends girl 16B.
• Boy pulls out.
• Girl goes into depression.

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Causes

• Politics
• Deficit spending
• Financed by selling tesobonos short-term bonds
  backed by the dollar.
• Civil Unrest (rebellion in Chiapas)
• Low investor confidence due to the rebellion in
  Chiapas and the assassination of a presidential
  candidate led to investors sales of the
  tesobonos which depleted foreign currency
  reserves.
• Election Year
• Politicians were unwilling to offer higher
  interest rates on peso-backed bonds or reduce
  government spending.

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Causes - contd.

• Exchange rate
• Peso was overvalued but fixed to the dollar
• When the peso began to fall the Mexican
  government had to spend most of its reserves to
  keep the peso pegged to the dollar.
• Government eventually let the peso float (Dec. 22)

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Timeline Exchange Rate 1994

• December 20 Finance Minister Jaime Serra Puche
  declares upper limit of exchange rate band to be
  raised by 13
• December 21 Mexican Central Bank spends 6
  billion in reserves to defend the peso by end of
  day Central Banks reserves falls under 6
  billion
• December 22 Government lets peso float results
  in additional 15 depreciation
• December 26 Serra Puche schedules news
  conference canceled at last moment
• December 27 Peso depreciates to 5.45 pesos to US
  dollar
• December 29 Pres. Zedillo appoints new Finance
  Minister Guillermo Ortiz Martinez

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Foreign Exchange Rate

• Within 10 days of attempting to devalue the peso
  by 15 the Mexican government runs out of
  international reserves and forced to let the peso
  float
• Within 90 days the peso loses 50 of its value

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Chart
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Results

• During the crisis markets in developing
  countries were negatively affected.
• After the crisis was resolved investors
  discriminated against markets with similar
  attributes to the Mexican economy. (Argentina
  Brazil etc)
• Lots of short-term debt
• Low savings rates
• Large current account deficits
• Weak banking systems
• (Probably a good idea anyway.)

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Results - contd. (Losers)

• Mexican businesses who had international
  suppliers or debts held in dollars.
• Large industrial lay-offs.
• Salinas was not elected President of the WTO.
• Several well-publicized suicides.

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Rescue Program

• In January 1995 IMF US government and Bank for
  International Settlements promises loans to
  Mexico of almost 50 billion
• US Pres. Clinton promises loans of 20 billion in
  total value
• IMF promises an 18 month Stand-by Credit
  Agreement of approx. 17.7 billion
• Bank for International Settlements promises a 10
  billion line of credit to Mexico
• Bank of Canada promises short term swaps of
  approx. US 1 billion in value

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Winners Losers

• Tourists
• Foreign Markets in Asia and Europe
• Stockholders who quickly ran away from crisis

• Middle Class
• Poor
• Bankers
• Mexican society as a whole
• Other Latin American countries
• US Exporters
• US Dollar

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Bibliography

• http//econ.bu.edu/MorenoBadia/EC369/EC369notes/EC
  369_Mexico94.pdfsearchmexican20peso20graph20
  1994
• http//en.wikipedia.org/wiki/1994_economic_crisis_
  in_Mexico
• http//www.econreview.com/events/mexico1994b.htm
• http//www.galbithink.org/topics/mex/mex.htm
• http//www2.sjsu.edu/faculty/watkins/mexico95.htm

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Discussion

• What makes the Tequila Crisis different than the
  other economic crises weve discussed
• What incentives did the US (under President
  Clinton) have to aid Mexico