Portal:Mexico/December in the history of Mexico

From Wikipedia, the free encyclopedia

The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis, was triggered by the sudden devaluation of the Mexican 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 granted Mexico a $50 billion loan.

The crisis is also 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).

[edit] Causes of the economic crisis of 1994

While the crisis took place under President Zedillo, the causes are usually attributed to Carlos Salinas de Gortari's outgoing administration. Salinas de Gortari partly coined the term "December Mistake" when he stated in an interview that Zedillo's sudden reversal of the former administrative 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.", and in fact, it was the first of the "newly industrialized nations" to be admitted into the OECD in May, 1994. 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 políticos and media. Nonetheless this vulnerability was further aggravated by several unexpected events and macroeconomic mistakes of his administration.

Amongst several economists and historians, Hufbauer and Schoot (2005) have commented on several events in 1994, and the macroeconomic policy mistakes that precipitated the crisis:

• 1994 was the last year of the sexenio or 6-year administration of Carlos Salinas de Gortari who, following the PRI tradition on every election year, launched an amazingly high spending splurge, which translated into a historically high deficit
• In order to finance the historical deficit (a 7% of GDP current account deficit) Salinas issued the Tesobonos, an attractive type of debt instrument that was denominated in pesos but indexed to dollars
• Mexico experienced (common to those days) lax banking or corrupt practices; moreover, some members of the Salinas family (though only his brother, Raúl, was imprisoned) collected enormous illicit payoffs
• The most-likely-to-win candidate, Luis Donaldo Colosio, was assassinated in March of that year; a couple of months later José Francisco Ruiz Massieu, in charge of the investigation, was assassinated as well
• The EZLN, an insurgent rebellion, officially declared war on the government on 1 January; even though the armed conflict ended two weeks later, the grievances and petitions remained a cause of concern, especially amongst some investors.

More on the 1994 economic crisis in Mexico...