The Peso Crisis - I

A Monetary Crisis?

The Peso

• The Peso: Advertises its own contradictions

The Peso

• Money with Emiliano Zapata!

The Peso

• Zapata fought for campesinos’s land and corn, against money and its power

• Even on reverse side

• Zapata listening to a fellow campesino

• On left & background: gears, factories & smokestacks -- threaten peasant life

Crisis = Devaluation?

• What is generally meant by “the Peso Crisis” is the sudden drop in the value of the peso in late 1994.

• But… is that all there was to it?• No, the drop was the result of a year of

crisis and drama in Mexico• That began with the Zapatista rebellion on

January 1, 1994

Chronicle

• Dec 13: EZLN Letter/Warning• Dec 18: EZLN Breakout• Dec 19: Zedillo Calls Meeting, Jaime Serra

says 15% devaluation• Dec 20: Serra announces devaluation,

government blames EZLN• Dec 21: fight from peso, drops 40%, peso

floated

Dirty Float

• prior to Dec 21– peso was “floating”, no official price– but state “supported” its value through intervention

• Intervention:– spending foreign exchange reserves to buy pesos

• impossible to sustain– provoking increased demand for pesos by foreign

speculators• selling off Mexican government assets• open financial markets

Free Float

• Devaluation on Dec 20 – meant no more government intervention– revealed government couldn’t avoid letting

price drop– it was running out of reserves

• Devaluation– revealed govt’s failures

• financial• jawboning• political

Consequences - I• Inflation

– prices of imported goods rose, not just luxury goods but basic food stuffs, e.g., corn for tortillas

• High Interest Rates– state policy to stem outflow of hot money– interest rates on state bonds rose to 50%– response to Fed increase of US rates

Consequences - II

• Real Wages Fell– immediate result of inflation caused by

devaluation– fall in standard of living for those with no

savings, eventual fall for almost everyone– higher interest rates reduced consumer

expenditures on durables

Consequences - III

• Increased Unemployment– much Mexican industry was dependent on

imported intermediate materials – the devaluation drove up prices of imports and

raised business costs dramatically– high interest rates drove smaller businesses

bankrupt as loan rates floated up w/offical rate

• Increased Migration North– worsening situation in Mexico increased

differential between Mexico & U.S.

Consequences -IV• Exports would increase

– exports now cheaper for foreigners to buy because pesos cheaper to buy

– except for those dependent on large imports of intermediate goods whose prices rose

– export boom + reduced wages would draw some MNC direct investment

• Imports would decrease– imports now more expensive– US exports would decrease (undercut NAFTA)

--END?--