Miami University Mexican Tequila Hangover The Mexican Peso Crisis and Its Aftermath Reflection Paper


Please read a chapter titled Tequila Hangover: The Mexican Peso Crisis and Its Aftermath
from the 2012 book Tearing Down Walls – The International Monetary Fund 1990 – 1999 by James M. Boughton. Then write a reflection based on the reading. In your reflection, please address the following questions in your own words:
Why does the author think the Mexican peso crisis is a “classic example of a country’s stubborn adherence to a strong currency”?
How does the reading help you understand currency crises in general, such as their causes, impacts, and responses to them?

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Tequila Hangover:
The Mexican Peso Crisis and Its Aftermath
t was midnight in Madrid, and Pedro Aspe was not even the last speaker on the
program. But with his regal bearing, his smooth and practiced delivery, and—above
all—his compelling story, the Mexican finance minister had his audience in thrall.
Mexico, he asserted convincingly, had been a “pioneer” in transforming its economy
from one that was closed to competition, highly controlled and regulated, and
wracked by high debt and inflation, into a modern, open, and efficient economic
system based on market principles. With substantial help from the IMF and the
World Bank, Mexico had carried out a “profound reform of the State” that had put
its troubled economic past on the shelf and positioned it well for a stable and
growing future.
Aspe was delivering this message to a distinguished audience of the world’s finance
ministers and central bank governors, their spouses, and other guests who had gathered
at the historic Castillo de Viñuelas in Spain on a lovely, warm late September night in
1994 to commemorate the fiftieth anniversary of the founding of the IMF and the
World Bank at Bretton Woods. Other speakers that evening included Michel Camdessus and Lewis Preston, the heads of the two institutions; Wim Duisenberg, the head of
the Netherlands central bank and of the governors of the Bank for International Settlements (BIS); and Jacques Polak, who spoke on behalf of his fellow veterans of the
Bretton Woods conference, several of whom were also present. Aspe, however, was
clearly the star of the evening, introduced by Duisenberg as the “personification of
stability . . . based on sound fundamentals.”1
One member of the audience knew Aspe particularly well, having been one of his
teachers when Aspe was studying for a doctorate in economics at the Massachusetts
Institute of Technology (MIT). Stanley Fischer had just moved from MIT to the IMF
that month to become the First Deputy Managing Director (FDMD), and he had every
reason to believe that Mexico, under the financial direction of his former star student,
had, in turn, fairly earned its global reputation as a star student of the IMF. In less than
three months, the report card would have to be dramatically rewritten.
and Duisenberg’s remarks are reproduced in the proceedings of the anniversary
conference (Boughton and Lateef, 1995, pp. 123–38).
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The foreign exchange crisis that hit Mexico at the end of 1994 was a classic
example of a country’s stubborn adherence to a “strong” currency. Its origins were
deeply rooted in the history of an economy that had experienced election-year excesses
and instability for decades. Nonetheless, for Mexico, for its major trading partners from
Canada to Argentina, and for the IMF, the crisis also had new and unique facets that
justified its being dubbed “the first financial crisis of the twenty-first century.”2 At the
IMF, the onset and the management of the crisis induced a great deal of soul-searching.
Was the Fund blinded by its admiration for a country that had emerged successfully
from earlier Fund-supported programs? How could the Fund have played a more effective role in preventing the crisis? Could (and should) the Fund have avoided being
drawn in so deeply in financing its eventual resolution?
Mexico as Star Student
By December 1994, Stanley Fischer had already earned a reputation as one of the
hardest-working people at the IMF. Late-night phone calls and early-morning
e-mails from the FDMD formed part of his legend and quickly became the expected
norm. Aside from long-standing personal habits, this diligence was Fischer’s response
to what he had found to be a surprising lack of hard information in the Fund about
events and trends in the world economy. So it was not unusual that he was on the
phone at 11:00 at night on December 19, talking to Jeffrey R. Shafer (assistant
secretary for international affairs at the U.S. Treasury) about financial developments in the Middle East. What was unusual was the bombshell that Shafer was
about to drop. By the way, Shafer injected, you know that Mexico is going to
2The origin of this oft-quoted phrase is not clear, but it most likely originated with Camdessus.
Rubin and Weisberg (2003) pp. 16–17, credits it to the Speaker of the U.S. House of Representatives, Newt Gingrich, but hedges by noting that Michel Camdessus used the same phrase around
the same time and that Gingrich “may not have been the first” to say it. The Mexican finance
minister, Guillermo Ortiz Martinez (1998), credited it to Camdessus, as have many others, including Fischer (2001) and this author (Boughton, 2001a) p. 443. To my knowledge, Camdessus’s
first documented statement of it came at a retreat of the Executive Board on January 26, 1995
(which, if Robert Rubin’s recollection is correct, would postdate Gingrich’s remark). At the
retreat, Camdessus was frustrated by the need to delay consideration of Mexico’s request for financial assistance until the staff report could be sent by telex or fax to capitals around the world for
consideration by national authorities. In response, he remarked that the Fund was dealing with
the first financial crisis of the twenty-first century using the techniques of the nineteenth. Six
days later, the U.S. Executive Director, Karin Lissakers (who had been present at the retreat),
remarked during a Board meeting that “I think it is not over dramatizing the situation to say that
we may in fact be facing, grappling now with the first financial crisis of the twenty-first century.”
(These two quotations were transcribed by participants in the meetings; they do not appear in
official minutes.) In October of that year, Camdessus stated in a speech that the “crisis in Mexico
has been described, by I don’t know whom, as the first financial crisis of the 21st century, meaning
the first major crisis to hit an emerging market economy in our new world of globalized financial
markets” (emphasis added); see
Mexico as Star Student
Mexican Finance Minister Pedro Aspe speaking in Madrid,
September 1994. (IMF photo)
devalue and float the peso tomorrow. Fischer did not know, and therein hangs
the tale.3
The most recent consultation with Mexico had been concluded nearly 10 months
earlier, on February 28, on the basis of discussions between the IMF staff and the authorities in Mexico City in early December, 1993. At that time, the Mexican economy had
been humming along with no major difficulties after four years of good economic growth
fueled by large and apparently reliable capital inflows (see Chapter 9). An uprising in
the southern state of Chiapas was causing domestic political problems but did not yet
pose a threat to economic or financial stability. Indeed, the authorities had been trying
3Throughout this chapter, statements not specifically attributed to documents or publications
are based on classified internal Fund documents or on interviews with participants in these
events. As described in the Preface, those interviews were conducted on a background basis. Most
interviews on this issue with IMF staff and management were conducted during or shortly after
the crisis in 1995. Interviews with Mexican, U.S., and European officials were conducted several
years later as part of the research for this book.
TE Q U I L A H A N G O V E R : T H E M E X I C A N P E S O C R I S I S
to discourage speculative inflows by allowing the exchange rate to fluctuate freely within
a crawling band and thus create some uncertainty about future movements. Although
the 1989 Extended Fund Facility arrangement had been extended to a fourth year in
May 1992, Mexico had decided not to draw on it after that date, and the authorities were
now in the process of repaying earlier drawings.4 Uncertainty about whether the U.S.
Congress would ratify the North American Free Trade Agreement (NAFTA) had limited investors’ interest in Mexico and thus depressed the growth rate in 1993, but since
NAFTA had come into effect at the beginning of 1994, Mexico’s growth prospects
looked much brighter. The Executive Board accordingly expressed mostly positive views,
echoing the staff’s conclusion that “Mexico’s medium-term prospects remain favorable.”5
The IMF was not completely insouciant about the current account deficit or the
exchange rate, even at this early date, but the optimists greatly outnumbered the worriers. Camdessus first expressed concerns to Aspe during a breakfast meeting in July
1993, and he repeated those concerns to the central bank governor, Miguel Mancera,
in October. On both occasions, and in the Article IV discussions, the authorities
pointed to continued strong growth in Mexico’s exports as evidence that the exchange
rate was not overvalued. Moreover, they believed that the crawling band policy already
gave them sufficient leeway to deal with any pressures that might arise.6 The staff accepted those arguments, as did most members of the Executive Board. At the meeting
to conclude the Article IV consultations in February 1994, Karin Lissakers (United
States) urged Mexico to depreciate the peso, and Douglas Smee (Canada) argued more
generally for greater flexibility in exchange rate policy. In contrast, Giulio Lanciotti
(Italy) embodied the majority in concluding that “the conditions seem to be in place
now for a successful hardening of the exchange rate commitment.”7
Barely three weeks after the Board meeting, Mexico’s short-term stability came
under threat following the March 23 assassination of Luis Donaldo Colosio, the leading candidate to replace Carlos Salinas de Gortari as president in the August elections.
The Bank of Mexico suddenly began to lose foreign exchange reserves at a rapid rate,
prompting Camdessus to use a previously scheduled press conference to reassure investors that Mexico’s economic policies were “fundamentally sound” and that the “signs
of nervousness in the financial markets . . . will be short-lived.”8 More concretely,
4For a review of the 1989 EFF arrangement with Mexico, see Boughton (2001b), pp. 510–15.
Mexico’s peak indebtedness to the Fund in this period was $6.6 billion in May 1992 (SDR 4.77
billion, or 409 percent of quota). Repayments through end-1994 reduced the balance outstanding
to $3.8 billion (SDR 2.6 billion, or 149 percent of the increased quota).
5“Mexico—Staff Report for the 1993 Article IV Consultation” (February 1, 1994), p. 13; and
the Chairman’s Summing Up, minutes of EBM/94/16 (February 28, 1994), p. 53. The staff and
Executive Board conclusions were identical except that the latter added “particularly” before
6Minutes of EBM/95/33 (April 4, 1995), pp. 1–2.
7Minutes of EBM/94/16 (February 28, 1994), pp. 11 (Lissakers), 13 (Smee), and 27 (Lanciotti).
8Transcript of press conference of Michel Camdessus, March 24, 1994; IMF archives, OMD/AI,
“Surveillance of Mexico” Box 1, Accession 2007-043.
Mexico as Star Student
the U.S. Treasury and the U.S. Federal Reserve System responded immediately by establishing a temporary $6 billion swap line that could be activated only if the IMF
Managing Director submitted a “comfort letter” supporting Mexico’s economic and
financial policies, which he promptly did.9 This swap line was made permanent the
following month, but by then the capital outflow had ebbed, and Mexico did not draw
on it for the rest of the year. Both the U.S. authorities and the IMF staff soon
concluded that the financial effect of the Colosio assassination was nothing more than
a liquidity crisis that had quickly passed. Although pressures could arise again in
connection with election-year uncertainties, everyone seemed confident that the
Mexican authorities could manage the situation.10
Mexico got a much-needed confidence boost in mid-May, when it became the first
new member of the Organization for Economic Cooperation and Development (OECD)
since New Zealand in 1973. Now Mexico could—and did—consider itself to be no
longer a developing country. It had joined the club of rich industrial nations, and it fully
expected to leave its troubled financial past in the dust of its economic progress.
Not everyone, however, was impressed. Many outside commentators were becoming
increasingly vocal in calling for a devaluation to correct what they saw as a substantial
overvaluation of the peso, which was depressing growth and threatening to stall
Mexico’s economic development. Rudiger Dornbusch, the highly respected and
knowledgeable MIT economist, led the choir, repeatedly articulating a detailed case in
the spring and summer of 1994 that the peso was overvalued by about 20 percent.
He concluded that “great damage . . . lies ahead unless the currency is devalued”
(Dornbusch and Werner, 1994, p. 287). Discussing that paper in early April, Stanley
Fischer (then a colleague of Dornbusch at MIT), among others, agreed with this
diagnosis (Dornbusch and Werner, 1994, p. 307). In July, the Economist reported that
“a growing chorus of financial pundits reckon a devaluation of some sort is likely just
after the [August presidential] election, if not before” (July 23, 1994, p. 76).
9The letter was sent to Lloyd Bentsen (secretary of the U.S. Treasury) and Alan Greenspan
(chairman of the U.S. Federal Reserve System) on March 24; IMF archives, OMD-AD
(Mr. Fischer’s files), Box 11508, Accession 1998-0105-0005, “Mexico Operational File 1994.”
10See “Foreign Exchange and Financial Markets in April 1994,” EBD/94/84 (May 17, 1994);
and memorandum from Ewart Williams to the Managing Director, “Mexico—Back-to-Office
Report” (June 16, 1994); IMF archives, OMD-AD (Mr. Fischer’s files), Box 11508, Accession
1998-0105-0005, “Mexico Operational File 1994.” Also see Lustig (1997). The IMF staff assessment was based on a staff visit to Mexico near the end of May, during which the authorities assured them that they had tightened macroeconomic policies since the assassination and were
prepared to float the exchange rate temporarily if necessary; see memorandum from Sterie T. Beza
(Director, Western Hemisphere Department) to the Managing Director, “Mexico—Supplement
to Back-to-Office Report” (June 16, 1994); IMF archives, OMD-AD (Mr. Fischer’s files), Box
11508, Accession 1998-0105-0005, “Mexico Operational File 1994.” After further informal discussions between the staff and the authorities, Camdessus sent a comfort letter to the BIS on July
21 in support of a proposal by major central banks to renew their “secondary line of reserves”
(swap lines) to Mexico. That letter is in IMF archives, OMD/AI, “Surveillance of Mexico” Box 2,
Accession 2007-043.
TE Q U I L A H A N G O V E R : T H E M E X I C A N P E S O C R I S I S
The proximate source of this worry was the external current account, which was in
deficit by about 7 percent of GDP.11 Although the government was running a small
surplus in its own accounts, it had to keep rolling over a large stock of short-term securities, a rising portion of which was held by nonresidents. After the Colosio assassination, investors—both domestic and foreign—became wary of holding peso assets.
The government countered by increasingly replacing peso-denominated treasury bills
(cetes) with bills that were payable in pesos but denominated in U.S. dollars (tesobonos).
Because holders of tesobonos were protected against a devaluation, these bills could be
sold at a lower interest rate than cetes. The interest rate spread between the two instruments doubled (to 8.7 percentage points) after the Colosio assassination. In response,
from end-February to end-November 1994, the government raised the portion of
tesobonos in outstanding debt from 6 percent to 50 percent.12 Although this shift
dramatically lowered the government’s borrowing cost, it created a large unhedged
foreign currency position for the government and thereby raised the potential cost of
a devaluation.
A window of opportunity to avoid an exchange crisis opened in August, when
Ernesto Zedillo Ponce de León (Colosio’s replacement on the ballot) won the
presidential election, widely regarded as the cleanest and fairest in Mexican history.
Financial markets responded favorably to the prospect of a Zedillo presidency, and the
Salinas government could have taken advantage of the calm to engineer a devaluation
by adjusting the crawling band. The main advocate for devaluation within the administration was the deputy finance minister, Guillermo Ortiz Martinez, but several other
senior officials and some of Zedillo’s top advisors were opposed. Ortiz’s view was bolstered by an independent study of Mexico’s exchange rate policy that had been commissioned secretly by Colosio and then submitted to Zedillo. The paper, prepared by
two foreign economists—Sweder van Wijnbergen and Nissan Liviatan—and completed in September, supported the view that the currency needed to be depreciated,
preferably by floating the peso. Aspe, Mancera, and ultimately Zedillo all rejected the
argument or at least indicated that they preferred to wait until after the new government took office on December 1. They viewed a stable exchange rate as an essential
11For the IMF staff’s analysis of the causes of the crisis and the role of the external current
account deficit, see Savastano, Roldós, and Santaella (1995). For academic views, see Calvo and
Mendoza (1996) and Lustig (1995). For a contrasting analysis by senior officials of the Bank of
Mexico, see Gil-Díaz and Carstens (1996), which emphasizes the role of political shocks in
addition to financial factors as contributors to the crisis.
12Mexico began issuing tesobonos in July 1989, but the amounts outstanding remained small
until after the Colosio assassination. On Mexico’s debt restructuring in 1994, see Folkerts-Landau
and Ito (1995), pp. 55–56.
Mexico as Star Student
anchor for the health of the economy, and they believed that their macroeconomic
policies were strong enough to sustain it.13
The postelection calm was shattered on September 28, with the assassination of José
Francisco Ruiz Massieu, the secretary general of the Partido Revolucionario Institucional (PRI), the political party of both Salinas and Zedillo. Remarkably, this second political killing of the year came just one day before Aspe’s triumphal speech in Madrid,
described in the introduction to this chapter. A few days later, the IMF staff met with
the Mexican delegation to the IMF/World Bank Annual Meetings in Madrid and again
accepted the glowing official account of economic developments. In a move that Camdessus would later realize was a major mistake for the IMF, both sides agreed that the
next Article IV discussions, previously scheduled for December, could safely be postponed by a month or two to give the Zedillo administration time to settle into the job.14
By mid-November, allegations that Raul Salinas, brother of the president, was responsible for the killing of Ruíz were gaining enough traction to induce deeper worries
about Mexico’s political and economic stability.15 When the U.S. Federal Open Market Committee continued to raise short-term interest rates, capital outflows from
Mexico rose sharply. In response, Salinas, Zedillo, and their top economic advisors
gathered at Salinas’s home on the weekend of November 19–20 to consider—for one
last time before the hand over of presidential power—whether to devalue the peso.
By this time, Zedillo realized that devaluation was inevitable, and Salinas indicated he
was prepared to take responsibility for it if it occurred right away. After many hours of
discussion, however, Aspe’s firm opposition still prevailed. No action was taken, but
Zedillo issued a public statement of support for Salinas’s and Aspe’s policies, which
induced a strengthening of the currency during the last 10 days of the Salinas
Throughout this period of financial turmoil, the IMF had no current information
on Mexico’s foreign exchange reserves and had to rely on the most recent published
13For an indirect reference to the secret Wijnbergen-Liviatan study, see Salinas (2002), p. 1116.
The internal rift on this issue was described contemporaneously in the Financial Times
(September 13, 1994, p. 4): “The possibility of a change in exchange rate policy has been heightened by a reported division between . . . Aspe . . . and the central bank [i.e., Mancera], on the
one hand, and . . . Ortiz on the other. The former are believed to support a strong currency . . .;
Mr. Ortiz is said to back a faster devaluation of the currency.”
14Minutes of meeting of Beza and other IMF staff with Aspe and other Mexican officials on
October 5, 1994; IMF archives, “L.A.W. Mexico Project 1995,” Accession AR 2007-043, Box 2.
For Camdessus’s reassessment of the postponement decision (which he misremembered as having
been made in mid-November, not early October), see minutes of EBM/95/33 (April 4, 1995),
p. 3.
15In 1999, Raul Salinas was found guilty of ordering the killing of Ruíz. His conviction was
overturned on appeal in 2005.
16Aspe’s account of this meeting was published in the Wall Street Journal (July 14, 1995),
p. A13. For Salinas’s account, see Salinas (2002), pp. 1091–93.
TE Q U I L A H A N G O V E R : T H E M E X I C A N P E S O C R I S I S
data.17 Those figures, for mid-October, showed no significant worsening since April.
The staff knew that the Mexican government was relying increasingly on issuing tesobonos, but its information on the magnitude was based primarily on published accounts
and thus was a few months out of date. In any case, despite the obvious risks, selling
tesobonos seemed to be a rational financial strategy as long as the reserve position was
comfortable. Neither the staff nor the Executive Board saw any particular reason to
raise alarms about Mexico’s financial prospects.
On November 30, it happened that the Executive Board met to discuss a proposal
to establish a new lending facility. This “short-term financing facility” would have
offered quick-disbursing loans to countries with strong economic policies that were
facing adverse conditions for reasons outside their control. To most everyone involved,
Mexico seemed to be the shining example of a qualifying country. Even those Directors
who opposed creating the new facility expressed admiration for Mexico’s economic
management. As Willy Kiekens (Belgium) noted at this meeting, “of the three cases
presented by the staff, only the Mexican case is a strong one.” Stefan Schoenberg
(Germany) observed that “the balance of payments pressures” on Mexico (and on two
other countries) had “subsided quickly once policy adjustments were made.”18
The conclusion that the IMF was unaware of the precarious position of Mexico’s
finances in the weeks and months preceding the crisis is hard to avoid.19 Several
reasons have been advanced for this display of innocence, some unique to the particular case and some deriving more generally from the culture of the institution. Certainly
the Mexican authorities had star quality and had all the confidence-instilling appearance of being in firm control. Thus, they could provide limited information about their
foreign exchange reserves without being subject to strong criticism. As a new member
of NAFTA and the OECD, they were more inclined to share information with the
U.S. Treasury than with the IMF. More generally, Fund surveillance suffered at the
time from being intermittent. The last full-scale staff mission to Mexico had occurred
in December 1993. A small staff visit in May 1994, a brief meeting in Madrid in
October, and occasional telephone conversations were not sufficient to keep the staff
17The staff raised concerns about the quality of Mexico’s monetary statistics in the course of
the December 1993 Article IV discussions. The initial draft of the staff report for that mission
noted that although Mexico’s monetary data were “generally satisfactory,” their “quality and
timeliness . . . seem to have deteriorated somewhat.” When the authorities objected to this description, the latter phrase was deleted; “Mexico—Staff Report for the 1993 Article IV Consultation,” EBS/94/31 (February 1, 1994), p. 10; and EBS/94/31, Correction 1 (February 22, 1994).
The May 1994 staff visit did not raise any questions in this area.
18See “Short-Term Financing Facility,” EBS/94/193 (September 26, 1994), and minutes of
EBM/94/104 (November 30, 1994). The quotations are from the minutes, pp. 21 (Kiekens) and
30 (Schoenberg). The other two countries cited in the staff report as possible candidates were
Sweden and the Czech Republic. For more on this proposal, see “Emergency Financing and the
Supplemental Reserve Facility” in Chapter 5 of this volume.
19Several years later, Fischer (2001) admitted that the “IMF and investors simply did not know
what was happening to Mexico’s reserves in the lead-up to the crisis.”
The Peso Crisis Hits
well informed. A great deal of information could be gleaned from the actions and
writings of private investors and analysts, but that information was not systematically
scrutinized by the staff working on Mexico. Eventually, the Fund absorbed the lessons
from these failings, but not in time to help with this case, the first crisis of its kind.20
The Peso Crisis Hits
The crisis began not with a financial shock, but with an outbreak of political
chaos. On Monday, December 19, 1994, the Zapatista National Liberation Army
came out of hiding in Chiapas and exerted temporary control over a number of
towns throughout the state. The Zapatista movement had been building up steam
since its original attacks in January, and this sudden success—brief though it would
turn out to be—caused both domestic and international investors to reconsider the
risk that the new government in Mexico City would be unable to control the
economy while fighting an insurgency in the south. Stock and bond prices fell
sharply, and the exchange rate (then 3.46 pesos per U.S. dollar) looked more vulnerable than ever. The effects of the Chiapas uprising alone could have been
contained, but this shock climaxed a year of growing unrest and assassinations that
had already made the financial situation in Mexico precarious.
The only viable option left to the government was to allow the peso to depreciate
more rapidly, either in a free float or through an immediate devaluation and a widening
of the band. Unfortunately, the government’s ability to act was constrained by its commitments under the Pacto de Solidaridad Económica, generally known simply as the
Pacto. This arrangement came about in December 1987, when the government formally
agreed with business and labor leaders to devalue the peso, establish a de facto crawling
peg against the dollar, and support the new exchange regime with a package of fiscal and
other policies aimed at sharply reducing price and wage inflation and stabilizing the
economy.21 The Pacto participants renegotiated the specific policy agreements annually, but a consistent feature of the Pacto was that the government promised not to alter
the exchange regime without first consulting its business and labor partners. In normal
circumstances, this commitment helped maintain labor peace, but in the circumstances
of December 1994 it proved to be a disastrous constraint.
Zedillo’s finance minister, Jaime Serra Puche, had been in office for only a few
weeks, and his previous experience had been primarily in trade rather than finance.
(As Salinas’s secretary of trade and industry, Serra had presided over the NAFTA
a detailed examination of the shortcomings in the run-up to the peso crisis, see
“Mexico—Report on Fund Surveillance, 1993–94,” EBS/95/48 (March 23, 1995).
21For a brief summary of the origins of the Pacto in the context of the debt crisis of the 1980s,
see Boughton (2001b), pp. 451–52. For overviews of the evolution of the agreement, see Aspe
(1993) and Dornbusch and Werner (1994), Appendix A.
TE Q U I L A H A N G O V E R : T H E M E X I C A N P E S O C R I S I S
negotiations.) Nonetheless, he responded immediately to the financial pressure on
December 19 by calling a meeting of the Pacto principals for that evening. When the
business and labor officials gathered at the headquarters of the labor ministry in
Mexico City, Serra boldly proposed allowing the peso to float, but both groups flatly
refused. Eventually, those gathered reached a compromise under which the peso would
be devalued by 15 percent the next morning, but everyone present realized that this
action might not be enough (see Salinas, 2002, pp. 1102–03).22
Although no one in the Mexican government seems to have thought it necessary
to tell the IMF, their economic team spoke frequently with Shafer and others in the
U.S. Treasury and kept them informed as these plans developed. That led to the stunning situation late that night, in which the IMF first learned of the impending devaluation through a casual comment by Shafer to Fischer during a routine telephone
conversation (see above, pp. 456–57).
The next morning, Lawrence H. Summers (under secretary for international affairs
at the U.S. Treasury) telephoned Fischer and asked him to issue a statement of support
for the devaluation. Fischer readily agreed because he believed that Mexico’s policies
were basically sound except for the obvious need to correct the overvaluation. He
telephoned Camdessus, who was vacationing at his family home in the south of France.
Fischer then intended to issue a press release, but new developments intervened.
For two days, the Mexican authorities tried desperately to keep the peso within
15 percent of its old level, but they fought a losing battle. Despite a rise in short-term
interest rates to 32 percent from 15 percent, the Bank of Mexico continued to lose
reserves. (In one week, the loss totaled $6.4 billion.) Much of the capital outflow
apparently derived from Mexican residents sending their money abroad, in all probability led by those who had received early warning of the magnitude of the situation at
the Pacto meeting Monday night. By Wednesday afternoon, December 21, Zedillo and
Serra had concluded that they would have to float the peso after all. Serra held a second Pacto meeting that evening, and this time no one was able to veto the change.23
22The specific decision was to lower the floor of the exchange rate band (the depreciation limit)
by 15 percent (to 4.0016 pesos per U.S. dollar) and to leave the daily rate of crawl for the widened
band unchanged. Because the exchange rate was already at the floor, this action effectively devalued the currency by 15 percent. In addition, the Pacto agreement reached that night included
fiscal and credit restraints to be implemented in the coming weeks. The Mexican press communiqué announcing the change was circulated within the Fund as EBD/94/200 (December 21,
1994). For the immediate staff reaction, see memorandum from Claudio Loser to the Acting
Managing Director (Fischer), “Mexico—Recent Developments” (Revised), December 20, 1994;
IMF archives, OMD-AD (Mr. Fischer’s files), Box 11508, Accession 1998-0105-0005, “Mexico
Operational File 1994.”
23On the extent and nature of capital outflows, see Folkerts-Landau and Ito (1995), pp. 57–62.
On the Pacto meeting, see Salinas (2002), p. 1106. Also see memorandum from Javier GuzmánCalafell (Advisor to the Executive Director for Mexico) to the Managing Director, “Mexico—
Exchange Arrangements,” December 22, 1994; IMF archives, OMD-AD (Mr. Fischer’s files), Box
11508, Accession 1998-0105-0005, “Mexico Operational File 1994.”
The Peso Crisis Hits
Figure 10.1. Mexico: Exchange Rate, 1994–95
Exchange rate (pesos per U.S. dollar)
Colosio assassination
Uprising in Chiapas
IMF approve