Sunday, July 11, 2010

The December Mistake, Also Known as the Mexican Peso Crisis

The economic crisis of 1994 in Mexico started with a sudden devaluation of the Mexican peso in December, 1994. The term "The December Mistake" was coined by the then ex-president, Carlos Salinas de Gortari. While the crisis took place under President Ernesto Zedillo, the causes are usually attributed to the policy actions and inactions of Carlos Salinas de Gortari's outgoing administration. Salinas popularized the term "December Mistake" when he referred to Zedillo's sudden reversal of his administration’s policies of tight currency controls, "a mistake."

In typical Mexican style, the outgoing presidential administration of Salinas, over-stimulated the economy prior to the elections, which came after two decades of increasing government spending, a period of hyperinflation from 1985 to 1993, huge debt loads and low oil prices. 1994 was the year of the sexenio, or the last year of the 6-year administration of Salinas.

At that time, Mexico had a fixed exchange rate system that accepted pesos at a fixed rate and paid out dollars. However, Mexico lacked sufficient foreign reserves to maintain the fixed exchange rate and was running out of dollars at the end of 1994. The peso then had to be allowed to devalue, despite the government's previous assurances to the contrary. This caused a crisis of confidence in Mexico. When Mexico tried to roll over (refinance) some of its debt, nobody was willing to buy it. This eventually put Mexico into default. As a result the Mexican peso devalued 80% in one week. Capital fled Mexico to the United States.

President Clinton led a task force to stabilize Mexico. He arranged loans and guarantees of almost $50 billion, of which the US put in $20 billion, and the International Monetary Fund put up almost $18 billion.

OK, so why the history lesson?

In order to stop criminal money laundering in Mexico, the government has instituted new restrictions on transactions in dollars. Foreign visitors to Mexico can exchange a maximum of $1,500 in cash into pesos per month. Businesses located in tourist zones have a limit of $7,000 per month. Mexican citizens can exchange $4,000 per month. To exchange dollars for pesos, one must now show identification, and foreign visitors are required to show a passport. All exchange transactions over $500 must be reported by the banks to the authorities.

This week, the governor of Baja California, José Guadalupe Osuna Millán, reported that since these new rules were implemented in June, 2010, they have identified 3,500 new bank accounts opened by Mexicans in the United States.