Mexico's Financial Crisis

Origins, Awareness, Assistance, and Initial Efforts to Recover Gao ID: GGD-96-56 February 23, 1996

Mexico's devaluation of the peso in December 1994 precipitated a crisis in Mexico's financial institutions and markets that continued into 1995. In response to the crisis, the United States assembled a financial assistance package of nearly $50 billion in funds from the United States, Canada, the International Monetary Fund (IMF), and the Bank for International Settlements. The multilateral assistance package was intended to enable Mexico to avoid defaulting on its debt obligations, and thereby overcome its short-term liquidity crisis, and to prevent the crisis from spreading to other emerging markets. This report (1) examines the origins of Mexico's financial crisis; (2) assesses the extent to which the U.S. government and the IMF were aware of Mexico's financial problems throughout 1994 and provided advice to Mexico; (3) describes the U.S. and the international responses to the crisis, including an assessment of the terms and the conditions of the agreements implementing the U.S. portion of the assistance; (4) analyzes the statutory authority for the Secretary of the Treasury's use of the Exchange Stabilization Fund to finance the assistance package; and (5) examines the initial efforts of Mexico to recover from the crisis, including Mexico's access to international capital markets.

GAO found that: (1) Mexico's financial crisis began in 1994 amid growing concern over Mexico's fiscal and monetary policies and exchange rate system; (2) although the United States expressed concern over Mexico's short-term exchange rate policies, the Federal Reserve and Treasury did not forsee the magnitude of the crisis; (3) U.S. and IMF assistance to Mexico was intended to help Mexico overcome its short-term liquidity crisis and to prevent those effects from spreading to emerging foreign exchange markets; (4) the United States pledged up to $20 billion in loans and security guarantees to Mexico under ESF, and IMF pledged $17.8 billion to Mexico under a standby arrangement to be disbursed over 18 months; and (5) the Treasury Secretary acted within his discretion by using ESF funds to provide assistance to Mexico to promote a stable exchange rate system.

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