Description
It lists the political turmoil of 1993 - 1994 and the scenario prevailing at that time.It then displays the foreign capital inflows into Mexico.It then talks about the conversion of cetes to tesobonos and how the country dealt with the crisis. It then finally highlights the bailout and performance since crisis.
THE MEXICAN PESO CRISIS – 1994
INTRODUCTION
?
In the early 1990’s Mexican economy seemed healthy with a robust GDP growth and new policy reforms kicking in Economy was growing again after the “lost decade”
?
?
?
Debt crisis (1982) Collapse of Oil prices (1986)
?
Reduced inflation; Increasing foreign investments; Growing forex reserves NAFTA – trilateral trade bloc to reduce trade barriers between USA, Mexico & Canada
?
POLITICAL TURMOIL 1993 - 1994
?
1994 being election year – huge public spending by the PRI
?
No measures on much needed devaluation of peso
?
Rebellion in southern province of Chiapas
? ?
raised doubts about Mexico’s political stability evoked fear among the foreign investors
?
Assassination of presidential candidate, Luis Donaldo Colosio
? ? ?
Colosio seen as harbinger of hope and change fears of political instability set off a brief financial panic sharp drop in international reserves – loss of $11 billion in about four weeks
?
Other political disturbances
? ? ?
resignation of the Minister of the Interior, Jorge Carpizo Jose Fransico Ruiz Massieu, a prominent political figure, was assassinated internal strife at the top levels of the Mexican government
SCENARIO IN MEXICO
?
Macroeconomic Variables
? ? ?
Large Current Account Deficit Overvalued peso Appreciating Real Exchange Rate
?
The Mexican Government played down the impact current account deficit. Possible reasons ? Election Year ? Based on robust GDP growth for the past 6 years ? "Pitchford Thesis“: Current account deficit is not bad if its driven by the private sector ? Capital inflow due to currency reforms of the government
FOREIGN CAPITAL INFLOW
?
Purchase of Bonds ($43 bn between 1990-94) ? Was the largest form of foreign capital inflow ? Major drivers • Low interest rates of the US (3-4% to Mexico’s 15% rate of return) • Sterilization policy of Mexican Government ? Short Term and attractive (one to 3 months maturity) ? Most risky one for Mexico because investors could pull out on immediate maturity Foreign Direct Investment ($24 bn between 1990-94) ? Long-term investment ? Involves commitments that cannot be reversed quickly at low cost ? Leads to investments in infrastructure and creation of physical assets
?
STERILIZATION INTERVENTION
? ?
Policy of constant Sterilization Intervention instead devaluation because elections were approaching Sterilization was done through therefore needed to:
? ? ?
of
?
To balance the Forex inflow To prevent pressure on monetary base and inflation To maintain credibility in the market To ensure booming forex reserves
? ?
?
Policy of managed peg in which the floor was kept constant while the ceiling was regularly increased The result: By November 1994 Mexico’s ratio of highly liquid overnment and bank liabilities increased to nine times the size of net international reserves, the highest in Latin America which put it in great risk (Joseph A. Whitt, Jr) Even many Mexicans were holding large amounts of cetes that could be shifted to dollars in a matter of days
CONVERSION OF CETES TO TESOBONOS
?
Cetes & Tesobonos
? ? ? ?
Short term/Liquid bonds (1 to 3 months) Less Risky and more attractive for investor Made popular by very low interest rates in US Very risky for Mexico Govt
?
Change in government Debt combination by November 1994:
? ?
25% Cetes (Peso-denominated) 70% Tesobonos (Dollar-indexed)
?
Purpose:
?
?
Immediate reduction in the interest cost of government debt Will restore investor confidence in the exchange rate peg
DEALING WITH THE CRISIS
?
Precarious position on 1 December Zedillo as assumed office:
? ? ? ?
Only $12.5bn in reserves Excessive short term securities Current account deficit was over $20 bn Exchange rate at the top of its target band
?
Options for Mexico
? ? ? ?
Tighten the monetary policy by raising interest rates Completely shift to a floating Peso Devalue the Peso Devaluing the currency using a Currency Board
THE CRISIS
The Colosio assassination brought in a long period of uncertainty along with falling reserves
Interest rates in US increasing, while Mexico did not increase their own as elections were slated To safeguard against depleting forex reserves, Mexico’s central bank, purchased private sector securities at lower interest rates than those demanded by the foreign investors.
This attempt to sterilize the fall in reserves proved to be incompatible with defense of the exchange rate peg. Thus, the monetary base went up and also ended pushing up the interest rates
Mexico developed a large debt because of its policies and majorly in the form of dollar-indexed tesobonos.
THE DECEMBER MISTAKE
?
On December 20,1994 the devaluation was announced, it increased the ceiling of the band to 4 pesos per dollar leaving the floor unchanged
? ?
No immediate panic as sale of tesobonos and cetes went as per plan
On December 21, the loss of governmental credibility led to a fall in reserves by $4.5 billion (largest single day decline in history of Mexico)
? ?
By December 22, forex reserves were reduced to less than $6 billion
The government was forced to abandon the exchange rate target band and allow the peso to float
?
Mexico suffered from a speculative attack that lead to a financial turmoil:
? ? ? ? ?
Very low levels of reserves Peso fell sharply to 5.7 peso per Dollar (35% depreciation) Government’s access to credit markets dropped sharply Very high Interest rates (More than 30%) The government was unable to pay its debts
BAILOUT & PERFORMANCE SINCE CRISIS
? ?
By January 1995, Mexico needed cash to avoid defaults and sought help primarily from U.S. commercial banks The Clinton administration proposed a direct-loan package including:
? ? ?
$20 billion from the US $18 billion from the IMF $13 billion from Bank for International Settlements and other commercial banks
?
?
To avoid a congressional vote, U.S. contribution was taken from the Exchange Stabilization Fund US & Mexico negotiated the terms of the loan
? ?
Mexico would limit money and credit expansion Mexican oil export revenues be deposited at the Federal Reserve Bank of New York as a form of collateral
?
?
The peso continued to weaken to 7.45 pesos per dollar, until Mexico announced a stringent austerity package in early March. After that, the peso strengthened significantly and in real terms remained stronger for the rest of 1995. The bailout and reform package were highly effective. Between 1996 and 1999, GDP grew by more than 5% per year. In January of 1997, Mexico paid back the US$13.5 billion in loans from the US government ahead of schedule
TEQUILA EFFECT - BRAZIL
Structural Adjustments and tax reforms to satisfy condition set by IMF for a $41.5 billion loan
Fears allayed in Brazil – Investors happy
Newly elected president Fernando Cardoso fails to get the IMF loan sanction
Final Blow - Itamar Franco, a former president and current governor of Minas Gerais, said that his state government would cease to service the state's $15 billion debt
Investors spooked – 2 billion $ run off/ day - Devaluation
TEQUILA EFFECT - ARGENTINA
Convertibility Act’ 1991 passed – Argentine Peso pegged to dollar
Great Reforms – Boom from 1991 - 1994
After 1994, Argentina faced a severe liquid crunch and went into a recession in March 1995 Economists say a perfect example of a contagion crisis - Very good fundamentals – Still economy went bust GDP fell by 4.5% and Domestic Investment fell by 16% - leading to a recession
CURRENT SITUATION
?
?
?
Effect on GDP and output ? Mexico’s economy faced a shocking contraction of 8.2% in its GDP, in the first quarter of the year 2009 ? The shrinkage came prior to the outbreak of the H1NI virus and its consequent damage to the economy ? Value-added output from industry fell by 9.9 % Causes of this downturn ? Global financial crisis taking place and the recession in the US, Mexico’s chief export market and source of remittances, foreign direct investment and tourists ? In addition to this deteriorating growth in the second quarter, will be the consequences of the swine flu outbreak Steps taken by Mexican Government ? sharp increase in investment expenditure as part of the government's countercyclical effort to mitigate the contraction in fixed investment ? Allowing commercial banks to use their required reserves as collateral for short-term funding through guaranteed loans. ? As for nonbank financial institutions, a guarantee fund of 2.5 billion pesos was set up to improve their access to liquidity
Thank You
doc_310065984.pptx
It lists the political turmoil of 1993 - 1994 and the scenario prevailing at that time.It then displays the foreign capital inflows into Mexico.It then talks about the conversion of cetes to tesobonos and how the country dealt with the crisis. It then finally highlights the bailout and performance since crisis.
THE MEXICAN PESO CRISIS – 1994
INTRODUCTION
?
In the early 1990’s Mexican economy seemed healthy with a robust GDP growth and new policy reforms kicking in Economy was growing again after the “lost decade”
?
?
?
Debt crisis (1982) Collapse of Oil prices (1986)
?
Reduced inflation; Increasing foreign investments; Growing forex reserves NAFTA – trilateral trade bloc to reduce trade barriers between USA, Mexico & Canada
?
POLITICAL TURMOIL 1993 - 1994
?
1994 being election year – huge public spending by the PRI
?
No measures on much needed devaluation of peso
?
Rebellion in southern province of Chiapas
? ?
raised doubts about Mexico’s political stability evoked fear among the foreign investors
?
Assassination of presidential candidate, Luis Donaldo Colosio
? ? ?
Colosio seen as harbinger of hope and change fears of political instability set off a brief financial panic sharp drop in international reserves – loss of $11 billion in about four weeks
?
Other political disturbances
? ? ?
resignation of the Minister of the Interior, Jorge Carpizo Jose Fransico Ruiz Massieu, a prominent political figure, was assassinated internal strife at the top levels of the Mexican government
SCENARIO IN MEXICO
?
Macroeconomic Variables
? ? ?
Large Current Account Deficit Overvalued peso Appreciating Real Exchange Rate
?
The Mexican Government played down the impact current account deficit. Possible reasons ? Election Year ? Based on robust GDP growth for the past 6 years ? "Pitchford Thesis“: Current account deficit is not bad if its driven by the private sector ? Capital inflow due to currency reforms of the government
FOREIGN CAPITAL INFLOW
?
Purchase of Bonds ($43 bn between 1990-94) ? Was the largest form of foreign capital inflow ? Major drivers • Low interest rates of the US (3-4% to Mexico’s 15% rate of return) • Sterilization policy of Mexican Government ? Short Term and attractive (one to 3 months maturity) ? Most risky one for Mexico because investors could pull out on immediate maturity Foreign Direct Investment ($24 bn between 1990-94) ? Long-term investment ? Involves commitments that cannot be reversed quickly at low cost ? Leads to investments in infrastructure and creation of physical assets
?
STERILIZATION INTERVENTION
? ?
Policy of constant Sterilization Intervention instead devaluation because elections were approaching Sterilization was done through therefore needed to:
? ? ?
of
?
To balance the Forex inflow To prevent pressure on monetary base and inflation To maintain credibility in the market To ensure booming forex reserves
? ?
?
Policy of managed peg in which the floor was kept constant while the ceiling was regularly increased The result: By November 1994 Mexico’s ratio of highly liquid overnment and bank liabilities increased to nine times the size of net international reserves, the highest in Latin America which put it in great risk (Joseph A. Whitt, Jr) Even many Mexicans were holding large amounts of cetes that could be shifted to dollars in a matter of days
CONVERSION OF CETES TO TESOBONOS
?
Cetes & Tesobonos
? ? ? ?
Short term/Liquid bonds (1 to 3 months) Less Risky and more attractive for investor Made popular by very low interest rates in US Very risky for Mexico Govt
?
Change in government Debt combination by November 1994:
? ?
25% Cetes (Peso-denominated) 70% Tesobonos (Dollar-indexed)
?
Purpose:
?
?
Immediate reduction in the interest cost of government debt Will restore investor confidence in the exchange rate peg
DEALING WITH THE CRISIS
?
Precarious position on 1 December Zedillo as assumed office:
? ? ? ?
Only $12.5bn in reserves Excessive short term securities Current account deficit was over $20 bn Exchange rate at the top of its target band
?
Options for Mexico
? ? ? ?
Tighten the monetary policy by raising interest rates Completely shift to a floating Peso Devalue the Peso Devaluing the currency using a Currency Board
THE CRISIS
The Colosio assassination brought in a long period of uncertainty along with falling reserves
Interest rates in US increasing, while Mexico did not increase their own as elections were slated To safeguard against depleting forex reserves, Mexico’s central bank, purchased private sector securities at lower interest rates than those demanded by the foreign investors.
This attempt to sterilize the fall in reserves proved to be incompatible with defense of the exchange rate peg. Thus, the monetary base went up and also ended pushing up the interest rates
Mexico developed a large debt because of its policies and majorly in the form of dollar-indexed tesobonos.
THE DECEMBER MISTAKE
?
On December 20,1994 the devaluation was announced, it increased the ceiling of the band to 4 pesos per dollar leaving the floor unchanged
? ?
No immediate panic as sale of tesobonos and cetes went as per plan
On December 21, the loss of governmental credibility led to a fall in reserves by $4.5 billion (largest single day decline in history of Mexico)
? ?
By December 22, forex reserves were reduced to less than $6 billion
The government was forced to abandon the exchange rate target band and allow the peso to float
?
Mexico suffered from a speculative attack that lead to a financial turmoil:
? ? ? ? ?
Very low levels of reserves Peso fell sharply to 5.7 peso per Dollar (35% depreciation) Government’s access to credit markets dropped sharply Very high Interest rates (More than 30%) The government was unable to pay its debts
BAILOUT & PERFORMANCE SINCE CRISIS
? ?
By January 1995, Mexico needed cash to avoid defaults and sought help primarily from U.S. commercial banks The Clinton administration proposed a direct-loan package including:
? ? ?
$20 billion from the US $18 billion from the IMF $13 billion from Bank for International Settlements and other commercial banks
?
?
To avoid a congressional vote, U.S. contribution was taken from the Exchange Stabilization Fund US & Mexico negotiated the terms of the loan
? ?
Mexico would limit money and credit expansion Mexican oil export revenues be deposited at the Federal Reserve Bank of New York as a form of collateral
?
?
The peso continued to weaken to 7.45 pesos per dollar, until Mexico announced a stringent austerity package in early March. After that, the peso strengthened significantly and in real terms remained stronger for the rest of 1995. The bailout and reform package were highly effective. Between 1996 and 1999, GDP grew by more than 5% per year. In January of 1997, Mexico paid back the US$13.5 billion in loans from the US government ahead of schedule
TEQUILA EFFECT - BRAZIL
Structural Adjustments and tax reforms to satisfy condition set by IMF for a $41.5 billion loan
Fears allayed in Brazil – Investors happy
Newly elected president Fernando Cardoso fails to get the IMF loan sanction
Final Blow - Itamar Franco, a former president and current governor of Minas Gerais, said that his state government would cease to service the state's $15 billion debt
Investors spooked – 2 billion $ run off/ day - Devaluation
TEQUILA EFFECT - ARGENTINA
Convertibility Act’ 1991 passed – Argentine Peso pegged to dollar
Great Reforms – Boom from 1991 - 1994
After 1994, Argentina faced a severe liquid crunch and went into a recession in March 1995 Economists say a perfect example of a contagion crisis - Very good fundamentals – Still economy went bust GDP fell by 4.5% and Domestic Investment fell by 16% - leading to a recession
CURRENT SITUATION
?
?
?
Effect on GDP and output ? Mexico’s economy faced a shocking contraction of 8.2% in its GDP, in the first quarter of the year 2009 ? The shrinkage came prior to the outbreak of the H1NI virus and its consequent damage to the economy ? Value-added output from industry fell by 9.9 % Causes of this downturn ? Global financial crisis taking place and the recession in the US, Mexico’s chief export market and source of remittances, foreign direct investment and tourists ? In addition to this deteriorating growth in the second quarter, will be the consequences of the swine flu outbreak Steps taken by Mexican Government ? sharp increase in investment expenditure as part of the government's countercyclical effort to mitigate the contraction in fixed investment ? Allowing commercial banks to use their required reserves as collateral for short-term funding through guaranteed loans. ? As for nonbank financial institutions, a guarantee fund of 2.5 billion pesos was set up to improve their access to liquidity
Thank You
doc_310065984.pptx