Mexico escaping the debt crisis
Once Upon A Time in Mexico… On August 15, 1982, economic difficulties which had been growing in Mexico for nearly a decade reached a final breaking point. ... After yielding to market pressure and permitting devaluation to occur on two separate occasions, Finance Secretary, Jesús Silva Herzog was ultimately forced to announce that the nation could no longer meet interest payments on its foreign debt. With no plausible alternatives remaining, Mexico signed a stand-by agreement with the IMF and within months Portillo would lose his re-election bid for the presidency. Clearly the need for a dramatic change in leadership and economic policy was evident to both scholars and the citizens of Mexico alike. What led to the debt crisis that erupted in the summer of 1982 To understand the roots of the Mexican debt crisis of 1982, it is important to look briefly at Mexicos political and cultural history. Mexico has strong nationalistic provisions embedded in its constitution. ... Furthermore, due to strategic losses suffered in the 1846 Mexican-American war, Mexico was wary of foreign capital and control . A “one party system” and Mexico’s cultural propensity for social peace combined to confer the government with significant leeway in quickly implementing strong fiscal policy. The 1982 debt crisis was, in reality, a holdover from a budding crisis in the mid-1970s. ... Echeverrías policies diminished investor confidence and estranged the private sector to the point that Mexico experienced a sharp drop in investment and ultimately the GDP as a whole. ... In 1976 Mexico was forced to devalue the Peso by 40 percent as the nation found itself with few reserves available to manage its fixed exchange rate. However, before long Mexico experienced an abrupt turn of luck in the form of new oil discoveries. Optimism about oil income helped push the looming crisis to the background. ... Between 1978 and 1981, the government spent heavily on energy, transportation, and basic industries and Mexico became more dependent on oil as a revenue generating export. ... Despite the government raising tariffs to further shield domestic producers from competition, Mexico maintained a foreign trade deficit and the ineffectiveness of the tariffs only served to hamper the modernization and competitiveness of the Mexican industry. ... By 1982, Mexico’s budget deficit had risen from 3% to 8% of its GDP and millions of dollars were leaving the country every day . Interest on long-term debt alone now consumed a considerable portion of export revenue and Mexico was experiencing annual inflation reaching 100%. When Mexico was confronted with falling oil prices, its economy experienced extreme capital flight, cascading devaluations of the Peso to replenish the central bank’s reserves, and lowered real wages. Cut off from additional credit, the government stopped making payments on debt. Mexicos reserves ran out and it declared it could not pay the $80 billion of external debt. De La Madrid (1982-1988) attempts to confront the problem De la Madrid was elected in 1982 amid this serious financial crisis in Mexico. In August 1982 (as described above) after several Peso devaluations, Mexico defaulted on its foreign loans. ... Capital flight was occurring more rapidly than it had in the past, and foreign debt was at an all-time high. ... Mexico could not continue those policies if it wanted foreign investment. Although these actions immediately increased Mexico’s income and decreased government spending to 1960s levels, these actions were not popular with the general public because these stabilization strategies imposed high social costs.