Most experts now agree that the exchange rate crisis that shook Mexico at the end of December, 1994, was made possible, if not inevitable, by policy mistakes stretching back to at least March, 1994. Among the underlying weaknesses were an appreciated real exchange rate, declining Central Bank reserves, and an unstable structure of public and external debt. Nonetheless, poor handling of the initial exchange rate adjustment probably exacerbated the crisis that developed.
After assurances the previous week that the government was committed to exchange rate stability, on December 20 Jaime Serra Puche, the Finance Minister, announced that the upper limit of the exchange rate band would be raised by 13%. Mr. Serra made the announcement on radio and television rather than through official channels, and thus angered investors who felt that this was an inappropriate way to reveal a crucial policy shift. The exchange rate immediately depreciated to the top of the band.
Capital rushes out of the country. Reportedly the Mexican Central Bank spends $6 billion in reserves attempting to defend the peso, and by the end of the day the Central Bank's stock of reserves has fallen to under $6 billion.
Despite the fact that the previous day the Mexican president Ernesto Zedillo affirmed the government's commitment to the new exchange band, early on the morming on December 22 the government let the peso float. The peso quickly depreciates another 15%.