The Mexican Peso Crisis

The situation that arose in Mexico in 1995 after the devaluation of the peso by 15% sent the currency into a downward spiral over the succeeding months in what became known as the Mexican Peso Crisis. A currency crisis is defined by a sharp and unexpected decrease in the value of the currency. This was precisely the case in Mexico, losing over 60% of its value in less than four months. The drastic nature of the crisis came as a surprise to many because of the unprecedented success of the Mexican economy in the years before. Mexico had curbed its inflation, posted very impressive growth rates, and was reaping the global benefits of the imminent North American Free Trade Agreement. It certainly looked as if this historically unstable nation made a stand to become just the opposite, a country that stressed political and economic stability and strength. The seeds of the crisis had been planted in the form of policies, actions, and events that created an increasingly vulnerable economy and disaster was on the horizon. The following paper will examine both the causes and effects of the Mexican Peso Crisis of 1994. First, we must look back to the presidential term of Carlos Salinas and the policy actions that were undertaken in the early 1990s up through the months before the crisis. The growing state of vulnerability that the economy was subjected to was a direct result of decisions made during his term and the short term speculative investment during the same time. Secondly, we must be informed of the very unfavorable Mexican political climate in the months preceding the 1994 elections. Investor faith in Mexico declined drastically before the actual election due to both endogenous and exogenous economic factors. Then, the handling of the deteriorating economic situation and the devaluation of the peso by the new President, Ernesto Zedillo, which brought the country into the murky depths of a currency crisis shall be discussed. And finally, the speedy

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