Mexican Economic Crisis
In early January, 1995, the new Mexican Finance Minister Guillermo Ortiz announced a program to address the Mexican economic crisis. The program had three components:
Policy measures under this objective consisted of setting up a National Accord among workers, business, and government to assure wage and price moderation. In addition, the government declared its intention to reduce government spending by 1.3% of GDP and to cut sharply the amount of credit granted by state development banks. The objective was to moderate the pass-through of the exchange rate devaluation into domestic prices and thus preserve a significant real devaluation of the peso.
Mexican President Zedillo pledged to propose constitutional amendments to allow private investment in railroads and satellites, to open the telecommunications sector to competition, and to increase foreign participation in the domestic banking system. The Mexican government emphasized its commitment to market-oriented reforms.
Initiatives in this area included working with leading investment banks to address outstanding dollar-denominated public debt (tesobonos), creating a futures market in pesos, and establishing tight monetary policy to restrain inflation. In addition, the Mexican government sought external support to strengthen investor confidence and to promote an orderly evolution of the foreign exchange market.
The external support package discussed in early January amounted to about $18 billion dollars, with the U.S. providing $9 billion, U.S. commercial banks $3 billion, and other foreign governments about $6 billion. By mid-January the over-all amount under discussion had risen to the $25-40 billion range. By the end of February the size of the package of loan guarantees and credits had reached a final size of $52 billion.
This final package included $20 billion of loan guarantees from the U.S. government. Of this amount, $3 billion was to be disbursed immediately, $6 billion within four months, and the remaining $10 billion after July. The disbursement schedule was subject to Mexico sticking to its programmed restraint in government spending and monetary growth. As a source of collateral the Mexican government agreed to have importers of Mexican oil products make payment through an account at the Federal Reserve Bank of New York.
The package of external support also included $17.8 billion of credits from the International Monetary Fund, $10 billion in short-term loans from central banks via the Bank for International Settlements, and several billion dollars of loans from other governments in North and South America. The IMF loan amounts to over seven times Mexico's IMF quota of $2.4 billion, and is unprecedented in the history of the IMF.
Mexican Economic Crisis