Mexican Bailout

Mexico City - Palacio de Bellas Artes by Harshil Shah

President Clinton invoked emergency powers and granted a $20 billion loan to bail out Mexico. The loan was controversial, but Mexico repaid the loan early, and the loan averted a major financial crisis.

After the signing of the NAFTA agreement, Mexico became a better address to invest money in. In 1994 the Mexican government faced an election and thus engaged in expansionary fiscal policies. As a result, the government needed money. The Mexican government began issuing short-term bonds denominated in Mexican peso but with guaranteed payback in dollars. Foreign investors purchased the debt. However, violence in Mexico increased the risk premium on the bonds and would have resulted in a devaluation of the Peso, however the Mexican central bank intervened. The intervention, however, resulted in the Mexican central bank drawing down their dollars reserves. Mexico next devaluated the Peso, but that resulted in inflation and the loss of confidence in the Mexican economy. The country was close to a default on its debt. The United States agreed to step in January 1995 organized a $50 billion bailout that was administered by IMF. The US made a $20 Billion loan to the Mexican government.