Mexican Peso Crisis Essay
In 1994, the devaluation of the Mexican peso against the U.S dollar was reduced by 14%. This turned out to be a crisis because most of the fund managers liquidated funds due to fear of loosing investments; peso crisis was extended to Latin American and Asian financial markets., In 1995 alone prices increased by 35% and output was decreased by 6.2%, also Mexico’s per capita GDP fell by 5% during the crisis. In order to help restore financial stability, the United States, arranged a $50 billion bailout package in January 1995, to be regulated and controlled by the International Monetary Fund (IMF) with assistance from the G7 and the Bank for International Settlements(BIS). Of the $50 billion, $20 billion came from the United States, $17.8 billion
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from the IMF, $10 billion from the BIS, $1 billion from a combination of Latin American nations, and CAD$1 billion from Canada.
By the culmination of 1996, Mexico’s external debt was increased by 560 billion to its total external debt. Instead of fully opening up banking to foreign investment, the government has bailed out commercial banks to the tune of 545 billion by buying all their bad or shaky loans. This bailout allowed Mexico to repay about $25 billion dollars in bonds. Those investors endured no risk or losses, but were able to pass the bill on to ordinary Mexicans in the form of greater debt. Taking money from the poor and giving it to the wealthy has been an attribute of the IMF assistance following a crisis. The economy faced a critical economic decline and the peso's value depreciated regardless of the bailout's success in preventing a worse scenario. Growth did not resume until the late 1990s.
I believe that without assistance from the IMF many of these outcomes could have been avoided.
Instead of adding to their debts, Mexico would have been forced to renegotiate an extension of its debt’s maturity with its creditors and sell its assets to pay them off. Such measures would have restored market confidence in Mexico. Instead, the Mexican government was let off the hook, and Mexico’s debt holders collected their money back. On the other hand, I believe that IMF assistance gives countries a choice. In the absence of IMF funding, the country would have no choice but to adjust, making the solution more difficult. In conclusion, I believe some degree of moral hazard is …show more content…
inevitable.
IMF funding resulted in numerous trends over the years that have affected the receiving country in a negative way. Take into account that the IMF makes short-term loans while the recipient country makes changes to policy in return. This has not, however, helped countries move to the free market. The funding, however, has created loan addicts as a review of its lending reveals. According to The Cato Institute, a public policy research organization, “eleven nations have been relying on IMF aid for at least 30 years; 32 countries had been borrowers for between 20 and 29 years; and 41 countries had been using IMF credit for between 10 and 19 years. That is not evidence of either the success of the Fund’s so-called conditionality or the temporary nature of the Fund’s short-term loans”. (Institute, 1998). This trend has cumulated over many of years and shows that IMF funding is not helping countries, but rather creating more debt for them.
The International Monetary Fund is capable of providing assistance to nations in an objective, unbiased and responsible manner.
Like any other loan agreement, the lender would have some form of collateral from the borrower just in case the borrower fails to repay the loan without any other complicated policies. The IMF uses the loan in order to benefit themselves and to make changes to fiscal and monetary policies in the receiving countries. Their prime aim is not to assist countries but rather to make a profit of some benefit out of a bad situation. The IMF need to start putting their words into action by actually helping countries fix their financial debt instead of adding to it. First think of the crisis the country is in and how best you can assist. If the countries best interest is considered then the blame cannot be put on the
IMF.
from the IMF, $10 billion from the BIS, $1 billion from a combination of Latin American nations, and CAD$1 billion from Canada.
By the culmination of 1996, Mexico’s external debt was increased by 560 billion to its total external debt. Instead of fully opening up banking to foreign investment, the government has bailed out commercial banks to the tune of 545 billion by buying all their bad or shaky loans. This bailout allowed Mexico to repay about $25 billion dollars in bonds. Those investors endured no risk or losses, but were able to pass the bill on to ordinary Mexicans in the form of greater debt. Taking money from the poor and giving it to the wealthy has been an attribute of the IMF assistance following a crisis. The economy faced a critical economic decline and the peso's value depreciated regardless of the bailout's success in preventing a worse scenario. Growth did not resume until the late 1990s.
I believe that without assistance from the IMF many of these outcomes could have been avoided.
Instead of adding to their debts, Mexico would have been forced to renegotiate an extension of its debt’s maturity with its creditors and sell its assets to pay them off. Such measures would have restored market confidence in Mexico. Instead, the Mexican government was let off the hook, and Mexico’s debt holders collected their money back. On the other hand, I believe that IMF assistance gives countries a choice. In the absence of IMF funding, the country would have no choice but to adjust, making the solution more difficult. In conclusion, I believe some degree of moral hazard is …show more content…
inevitable.
IMF funding resulted in numerous trends over the years that have affected the receiving country in a negative way. Take into account that the IMF makes short-term loans while the recipient country makes changes to policy in return. This has not, however, helped countries move to the free market. The funding, however, has created loan addicts as a review of its lending reveals. According to The Cato Institute, a public policy research organization, “eleven nations have been relying on IMF aid for at least 30 years; 32 countries had been borrowers for between 20 and 29 years; and 41 countries had been using IMF credit for between 10 and 19 years. That is not evidence of either the success of the Fund’s so-called conditionality or the temporary nature of the Fund’s short-term loans”. (Institute, 1998). This trend has cumulated over many of years and shows that IMF funding is not helping countries, but rather creating more debt for them.
The International Monetary Fund is capable of providing assistance to nations in an objective, unbiased and responsible manner.
Like any other loan agreement, the lender would have some form of collateral from the borrower just in case the borrower fails to repay the loan without any other complicated policies. The IMF uses the loan in order to benefit themselves and to make changes to fiscal and monetary policies in the receiving countries. Their prime aim is not to assist countries but rather to make a profit of some benefit out of a bad situation. The IMF need to start putting their words into action by actually helping countries fix their financial debt instead of adding to it. First think of the crisis the country is in and how best you can assist. If the countries best interest is considered then the blame cannot be put on the
IMF.