In 1994 Mexican Peso crisis occur due todevaluation of Mexican peso against us dollar by 14 %. US Dollar v/s MEICAN peso exchange rate (nov/94 - jan/95)
Cause of the crises :• lax monetary policy pursued in 1994• over-valued exchange rate of peso• the large scale of the current account deficit, which had reached almost 8% of GDP in 1993 and 1994• high proportion of government debt paper was so short-term &high portion of this in non- residents• Political causes
Why did the devaluation of theMexican peso turn into a financial crisis?
Impacts of crisis :• Peso crisis rapidly spill over to Latin American and Asian financial markets• Most of fund manger liquidated funds due to fear of loosing investments• Foreign reserves fall down drastically• in 1995 alone, prices rose 35 %and output fell 6.2 %• Mexico’s per capita GDP fell by 5 per cent during the crisis
Bail out from crisis : financial packages of• US$ 50 billion composed of loans from the U.S. (US$20 billion),• the IMF ($17.8 billion)• the Bank of International Settlements (US$10 billion)• Canada (1 billion of Canadian dollars)• Group of Latin American countries (1 billion dollars)
Goals of Assistance:• Restore financial stability• Strengthen public finances and the banking sector• Regain investor confidence• Reinforce the groundwork for long-term sustainable growth
Lessons from peso crisis :• It is essential to have multi national safety net to safe guard the world financial system from these type of crisis .• Mexico excessively depended on the foreign capital to finance its economic development this policy has its own undesirable effects