Currency crisis in Mexico

            The first international currency crisis that took place due to the capital flight was in Mexico in December 1994. It all started when the government of Mexico opted for an expansionary fiscal and monetary policy.  This resulted in great capital being invested in the economy however, things begun to change for the worse after the assassination of presidential candidate and a violent uprising in Chiapas.  In response to this the government pegged the Mexican Peso to the US dollar. This resulted in increased demand for imports in Mexico leading to trade deficit. Moreover the government foreign reserves of worth $28 billion were gone in less than a year. Speculators started taking their money out of Mexico.

        When the central bank devalued the currency in December it led to an even increased risk premium for the foreign investors. This was actually the biggest mistake. In an attempt to discourage capital flights the government increased its interest rates but still the results were not desirable. Instead higher interest rates discouraged borrowers as it meant higher cost of borrowing. Soon Mexico faced a default after which the government allowed its currency to float freely that further led to depreciation of the currency. The economic situation became extremely bad when Mexico faced hyperinflation of approximately 52%. (Richard X, 2018)

        The effect of this unfortunate event was not only faced by Mexico alone but the economies of Asia and Latin America suffered too. This was because foreign investors stepped out of emerging markets in general. A bailout of worth $50 billion was organized for Mexico by the United States that was administered by IMF. This bailout was made possible by the support of G7 and Bank for international settlement. After this crisis the economic situation still faced many challenges for instance, collapse of banks, severe recession, poverty and unemployment.

References of  crisis in Mexico

Richard X, B. (2018, September 21). There's a global currency crisis unfolding that's sure to catch up to the US. Retrieved from https://www.cnbc.com/2018/09/20/dick-bove-theres-a-global-currency-crisis.html