amp Mexico Jessica Hofer Megan Garcia Start of Financial Crisis In 1979 the US Federal Reserve adopted a tough antiinflation policy which raised dollar interest rates and helped push the world economy into recession by 1981 ID: 220405
Download Presentation The PPT/PDF document "Financial Crisis in Latin America" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Financial Crisis in Latin America & Mexico
Jessica Hofer
Megan GarciaSlide2
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 countriesSlide3
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 countriesSlide4
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 growthSlide5
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)Slide6
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 levelsSlide7
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 troubleSlide8
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 IMFSlide9
Mexico’s Inflation