Mexican Exchange Rate Crisis

A Difficult Week

Dramatic Depreciation

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.

Tuesday, 20 December 1994

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.

Wednesday, 21 December

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.

Thursday, 22 December

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%.

Monday, 26 December

Mr. Serra, the Finance Minister, schedules a news conference to provide information about the government's plans to address the crisis. The conference is canceled at the last moment. Investors continue to complain about the government's failure to provide information about its plans to address the crisis. The peso continues to depreciate.

Tuesday, 27 December

The Central Bank and the Finance Ministry continue to remain silent, while the peso continues to drop and economic turmoil spreads. The peso depreciates to 5.45 pesos to the dollar, meaning that its value is 36% less than on the previous Tuesday. An auction of dollar-denominated government bonds fails to attract capital, bringing in only $27.6 million in bids to replace an issue of $774 million worth of bonds. Prices begin to rise and labor leaders push for wage renegotiations.

Thursday, 29 December

Pesident Zedillo appoints a new Finance Minister, Guillermo Ortiz Martinez.

Topic Mexican Economic Crisis