In 1994, the world saw the decline of the Mexican Peso, leading to what is now considered as the Mexican Peso Crisis. The crisis was characterized by the drastic decline in the value of the Mexican Peso. The Mexican Peso Crisis is considered significant because of its impact on other parts of the region, including Brazil. The following is a discussion of the causes and impact of the Mexican Peso Crisis.
The events/causes that led up to the devaluation of the peso
The Mexican Peso Crisis can be traced to the decision of then president Zedillo’s decision to reverse the government’s then policy that imposes tight controls on the Mexican Peso. This decision is considered by critics as an important factor that led to the Mexican Peso Crisis (Mathur, 17). It is important to note that the lifting of the tight controls on the Mexican Peso was intended to make some adjustments that would intentionally devaluate the Mexican Peso. However, the aim for the devaluation was just gradually in order to make the country competitive in the international business environment (Bhagwati, 8). The main factor that made the decision contribute to the Mexican Peso Crisis was that it was not properly handled as was necessary. The handling of the lifting of the currency controls was not effective at the political level or political aspect, such that the Mexican Peso experienced drastic and continued devaluation, which was opposite to the planned gradual and small devaluation of the currency. The result of the drastic decline of the Mexican Peso eventually resulted in the crisis (Mathur, 17).
The decision to lift the currency controls can also be traced to the pre-election decisions that were aimed to stimulate the Mexican economy in order to address the unsustainable nature of a significant percentage of the business in the country. However, this objective was not implemented properly, thereby leading to the Mexican Peso Crisis (Bhagwati, 8). It should be noted, prior to the crisis, there was already an increasing concern of economists and critics about the credit quality that was provided by the financial sector at the time when there was low interest rates that were applied by the government. There were also issues about the inappropriateness or ineffectiveness of the standards that were used in extending credit by the financial sector (Calvo, 171).
Another important factor that affected the financial sector and would eventually contribute to the development of the Mexican Peso Crisis was that the risk premium of the Mexican economy was significantly impacted by the armed conflicts that happened in Chiapas at that time. This armed conflict led to a decline in investor confidence about business in Mexico, such that there was a decline in the investment potential of the region (Mathur, 18).
In addition, in the decade leading to 1994, the government saw an increasing expenditure for various projects in the country. The result was an increased reduction in the funds...