The purpose of this report is to analyse the reasons for, the impact of, and the measures taken in response to the Mexican currency crisis of 1994-1995. The first objective is to assess the reasons for the crisis. Why did Mexico, a once immensely desirable investment destination become the bain of the international financial community following December 1994?
The second and chief objective is to assess the impact of the crisis on the foreign exchange and stock markets. The report answers why the crisis adversely affected the Latin American market indices while the US market indices continued to rise.
The third objective is to analyse the measures taken in response to the crisis by the Mexican Government and other international organizations. The key conclusion reached with respect to these three objectives is that the ensuring financial crisis following December 1994 could have been averted. Blame centers on the inadequate response of the Mexican Government and its failure to recognise and act upon the underlying causes of the crisis in a time effective manner.
Beginnings of the Mexican Currency Crisis
Several events culminated in the eventuation of the Mexican currency crisis, the first of which occurred on December 20, 1994. This day, widely recognised as beginning of the crisis marked the devaluation of the Peso to the Dollar by Mexican President Ernesto Zedillo by approximately 15% to relieve the pressure on the Peso/Dollar exchange rate. This decision, which was made without consultation with the US Government or the International Monetary Fund, was not accompanied by supporting fiscal or monetary measures to sustain the devaluation.
As a result, between December 20 and 21, $4 billion in foreign reserves was wi ...