Transcript 15-2x

FINANCIAL CRISIS IN LATIN
AMERICA
& MEXICO
Jessica Hofer
Megan Garcia
START OF FINANCIAL CRISIS

In 1979, the US Federal Reserve adopted a tough
anti-inflation policy which raised dollar interest
rates and helped push the world economy into
recession by 1981.

This had a direct negative impact on the developing
countries
OTHER IMPORTANT FACTORS
Immediate rise in the interest burden that debtor
countries had to pay
 Substantial rise in the real value of dollar debt
burden
 Primary commodity prices collapsed, depressing
terms of trade of many poor countries

WHAT HAPPENED NEXT?
Mexico announced in 1982 that its central bank
had run out of foreign reserves and could no
longer meet payments on foreign debt
 Large private lenders cut off new credits and
demanded repayment on earlier loans from other
Latin American countries
 Widespread inability of developing nations to
meet prior debt obligations
 Sometimes referred to as the “lost decade” of
Latin American growth

MEXICO
Introduces a broad stabilization and reform
program in 1987
 Reduction in public-sector deficits and debts



Using exchange rate targeting and wage-price
guidelines
Committed to free trade by joining various
organizations (GATT, OECD, NAFTA)
MEXICO’S EXCHANGE RATE
Fixed peso’s exchange rate to the US dollar in
1987
 Moved to a crawling peg in early 1989 and then
later to a crawling band in 1991
 Government annually announced a rising limit
on the currency’s allowable extent of
depreciation, permitting a range of fluctuation
 Peso appreciated sharply in real terms and
created a large CA deficit
 Over 1994, foreign exchange reserves fell to very
low levels

CONT’D
Government continued to extend credit to banks
experiencing loan losses
 Mexico rapidly privatized banking without
regulatory safeguards
 Banks had free access to foreign funds
 Banks were confident they would be bailed out if
they met trouble

NEW GOVERNMENT IN MEXICO
In 1994 a new government took over and
devalued the peso 15% beyond the limit promised
previously
 This was attacked by spectators and the
government switched to a floating exchange rate
 Foreign investors panicked; Mexico was unable to
borrow except at penalty interest rates
 Experienced similar financial crisis as in 1982,
only to be bailed out by a $50 billion emergency
loan from the US Treasury and IMF

MEXICO’S INFLATION
GDP deflator
160
140
120
100
80
60
40
20
0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
GDP
deflator