Abstract

Mexico had begun to experience financial turbulence in March 1994 when strong growth and rising interest rates in the United States prompted investors to reassess portfolios in emerging markets while, on the domestic front, the assassination of presidential candidate Luis Donaldo Colosio heightened investors’ concerns. When capital flight reached alarming proportions in March-April 1994, the authorities allowed the peso to depreciate to the top of the exchange rate band, doubled short-term interest rates, and obtained standby lines of credit from the United States, Canada, and the BIS. To reduce investors’ concerns, the authorities replaced peso-denominated government debt by short-term instruments indexed to the U.S. dollar (“Tesobonos”). The vulnerability of the economy sharply increased when, in a few months’ time, the issuance of Tesobonos increased by $22 billion.

Mexico had begun to experience financial turbulence in March 1994 when strong growth and rising interest rates in the United States prompted investors to reassess portfolios in emerging markets while, on the domestic front, the assassination of presidential candidate Luis Donaldo Colosio heightened investors’ concerns. When capital flight reached alarming proportions in March-April 1994, the authorities allowed the peso to depreciate to the top of the exchange rate band, doubled short-term interest rates, and obtained standby lines of credit from the United States, Canada, and the BIS. To reduce investors’ concerns, the authorities replaced peso-denominated government debt by short-term instruments indexed to the U.S. dollar (“Tesobonos”). The vulnerability of the economy sharply increased when, in a few months’ time, the issuance of Tesobonos increased by $22 billion.

The use of the exchange rate as a nominal anchor had led to a significant and persistant real effective appreciation of the peso during 1988-93. This appreciation and continued trade liberalization prompted a widening of the external current account to 6.5 percent of GDP in 1993 from 2 percent of GDP in 1988, and to 8 percent in 1994. While fiscal and wages discipline were maintained, persistent losses of foreign exchange reserves and declining stock market prices during 1994 became indicative of faltering confidence.

On December 20, 1994, shortly after President Ernesto Zedillo took office, the peso was suddenly devalued by 15 percent without flanking macroeconomic measures. A persistent hemorrhage of foreign exchange left the authorities with no alternative but to float the peso. These decisions had a devastating impact on confidence. With massive short-term foreign debt falling due for a total of approximately $50 billion in 1995 as a whole, the announcement, on January 2, 1995, of a U.S.-led swap package of $18 billion did not calm the financial markets.

The Mexican authorities were reluctant to request IMF financial assistance that, they thought, would not be helpful to resolve what they regarded as a confidence crisis. Moreover, Mexico had become a member of the OECD and the North American Free Trade Area (NAFTA) and believed its North American and European friends would extend it the necessary financing without IMF-type conditionality. In European capitals, however, the Mexican crisis and its contagion effects in the Latin American region were seen as problems for the United States to handle.

In late December 1994 and early January 1995, IMF staff missions held discussions with Mexican officials. The Managing Director, Michel Camdessus, met with the new Finance Secretary, Guillermo Ortiz, who announced that Mexico would seek IMF assistance. Mr. Camdessus then visited Mexico City for discussions with President Ernesto Zedillo. All through the month of January 1995, the Managing Director kept Board members informed in a series of confidential briefings.

On January 12, 1995, President Clinton requested the U.S. Congress to extend $40 billion in loan guarantees to Mexico. When it became clear that Congress—dominated by the Republican Party—would not give its support, the President withdrew his request on January 30 and announced that he would use his authority to provide Mexico with a much-reduced package of up to $20 billion in loans and loan guarantees through the Exchange Stabilization Fund.

The turn of events with regard to U.S. financial support and the state of extreme uncertainty in Mexico, pending the announcement of a comprehensive policy package, thrust the IMF, de facto, into a position of lender of last resort. This put an unprecedented responsibility on the Managing Director to act immediately and raise IMF financing to a level that would convince investors, cut short the slide in the markets, and mitigate the domestic impact of a crushing adjustment burden.

On January 31, 1995, the day after President Clinton scaled down the U.S. proposal of financial assistance, the Managing Director proposed to the Executive Board that the IMF provide Mexico with SDR 5.25 billion ($7.8 billion, equivalent to 300 percent of Mexico’s quota) outright upon approval of a stand-by arrangement, rather than in several tranches as had been considered earlier. In addition, the IMF would stand ready to provide up to SDR 6.81 billion ($10 billion), unless that amount, or part thereof, could be raised from bilateral creditors. The formulation of the latter proposal should be seen in light of the fact that a package of $10 billion from industrial countries through the BIS was unlikely to materialize because of the rigid conditions that were attached to it. Under the circumstances, the Managing Director argued that the IMF had no alternative but to stand ready to provide the additional financing from its own resources.

In an evening meeting on February 1, 1995, which started at 6 p.m. and lasted until midnight, the Executive Board approved a stand-by arrangement for Mexico in the amounts mentioned above, the largest IMF financing package proposed up to that time; the arrangement would run from February 1, 1995 to August 15, 1996 and would be subject to four Board reviews during that period. Several Western European Board members abstained from voting on the package, however, on the arguments that the proposed financing was too large, that the immediate access to 300 percent of quota was excessive, and that the Mexican policy program was too weak and its assumptions too optimistic.

The arguments with regard to the quality of the Mexican program were well taken. The peso continued to slide until March 9, 1995, when President Zedillo and Finance Secretary Ortiz announced much-strengthened measures that would decisively improve the fiscal position for 1995, tighten monetary policy to provide the nominal anchor for the economy, free wage negotiations, and introduce measures to repair the banking system and the loan restructuring facilities. Shortly thereafter, the peso began to strengthen and Mexico soon regained access to international capital markets. By the third quarter of 1995, real GDP was already rising again, helped by the fact that the basic structure of the economy was in much better shape than before and by a favorable external environment. Nevertheless, the year 1995 as a whole was the worst for Mexico since the debt crisis, with output falling by 6 percent, unemployment doubling, prices rising by more than 50 percent, real wages falling by 11 percent, and the financial system in need of fundamental repair.

In the third review of the program, on December 15, 1995, Executive Directors observed that a new round of turbulence had hit Mexico in October-December 1995 and that the authorities had drawn further on the available IMF financing, to a total of SDR 10.6 billion at the end of 1995. In each of the first three reviews, many Directors noted with concern the delays in the availability of U.S. financing through the Exchange Stabilization Fund. Indeed, the U.S. Congress was looking closely over the shoulder of the Administration. The cost of using U.S. financial assistance was distinctly higher than the cost of IMF credit: in addition to all costs and fees, Mexico had to pay interest charges that covered the credit risk, had to deposit an assured source of repayment (the proceeds of oil export sales), and had to agree to use fiscal and monetary policy, including increases in interest rates as needed, to stabilize the peso. By the time of the fourth review, on August 2, 1996, economic recovery was clearly under way, financial markets had stabilized, the policy conditions of the agreement were observed with ample margins, and attention was shifting toward urgent structural reforms in the financial system, tax reform, social security reform, and privatization.

In the following years, Mexico’s economic performance and external position continued to strengthen and major progress was made in implementing structural reforms. Mexico’s determined policies were a wise strategy to avoid the turbulence occasioned by the Asian, Russian, and Brazilian crises. Before the end of 2000, Mexico’s borrowing from the IMF had been completely repaid.

In the wake of the Mexican crisis, the Managing Director, Mr. Camdessus, was anxious to draw the lessons for the IMF and its members. Following extensive discussion—based in part on a confidential report on the crisis and Mexico’s relations with the IMF, prepared by Sir Alan Whittome, a former senior staff member—the Executive Board took decisions that focused on four areas:

First, new internal procedures to foster a more effective and continuous dialogue in the intervals between regular annual consultations, particularly when countries have just completed an adjustment program with the IMF.

Second, stricter requirements for the regular and timely communication of key economic indicators and of standards for the publication of data to enable markets to function more efficiently. That initiative led to the establishment of the Special Data Dissemination Standard to which members with, or seeking, access to capital markets have been encouraged to subscribe.

Third, more focused scrutiny of the capital account of the balance of payments and the sustainability of capital flows, as well as increased emphasis on developments in the financial sector and in external debt management.

Fourth, more candid, sharp, and transparent surveillance. In its policy dialogue with members, the IMF should be more critical and its analysis more pointed. Informal Board meetings on sensitive country matters were organized, while world economic outlook discussions in the Board were supplemented by periodic discussions of financial markets.

The following observations should be added to conclude this survey of IMF governance and the Mexican crisis of 1994-95.

First, the magnitude of the financial assistance proposed on February 1, 1995, was justified in view of (1) the inevitable impact on market confidence of the scaling down—under pressure from the U.S. Congress—of the U.S. Administration’s proposal of financial assistance to Mexico to $20 billion from $40 billion; (2) the size of Mexico’s short-term external debt of about $50 billion falling due in 1995; (3) the fact that the $10 billion lending package from industrial countries through the BIS was loaded with conditions that proved to be unacceptable to the Mexican authorities; and (4) the continued slide of the peso, which risked becoming a rout in the absence of convincing adjustment policies, which materialized only in March 1995.

Second, the cost of the 1994–95 crisis for the Mexican economy was sharp but short because of the decisive support from the IMF and because the economy had become stronger and more shock resistant. In the 1982 crisis, Mexico had needed several years to recover because the underlying structures, particularly the corporate sector, financial markets, institutions, and legal system, were then much weaker.

Third, the Mexican crisis of 1994–95 was not the first crisis of financial globalization. In fact, the first crises of the new era occurred in Europe, among high-income, industrial countries, such as the Nordic banking crisis, which struck Finland, Norway, and Sweden between the late 1980s and the early 1990s, and the crises of the European Monetary System (EMS) in 1992-93. Several of the principal fault lines of the Nordic and EMS crises appeared again in the Mexican crisis and would reappear, in differing circumstances and degrees, in 1997-98 in the Asian crisis.

Decision Making, Institutional Oversight, Transparency and Accountability
  • Abugre, Charles, and Nancy Alexander, 1998, “Non-Governmental Organizations and the International Monetary and Financial System,” in International Monetary and Financial Issues for the 1990s, Vol. IX (Geneva: United Nations Conference on Trade and Development).

    • Search Google Scholar
    • Export Citation
  • Baliño, Tomás J.T., and Angel Ubide, 2000, “The New World of Banking,Finance &Development, Vol. 37 (June), pp. 4144.

  • Bank for International Settlements, various years, Annual Report (Basel).

  • Birdsall, Nancy, 2001, “Global Finance: Representation Failure and the Role of Civil Society,Carnegie Economic Reform Project Discussion Paper No. 2 (Washington: Carnegie Endowment for International Peace ).

    • Search Google Scholar
    • Export Citation
  • Boughton, James M., 2001, Silent Revolution: The International Monetary Fund, 1979-1989 (Washington: International Monetary Fund).

  • Camdessus, Michel, 1998a, “The IMF’s Role in Today’s Globalized World,” address to the IMF-Bundesbank Symposium, Frankfort, Germany, July 2.

    • Search Google Scholar
    • Export Citation
  • Camdessus, Michel, 1998b, “From the Asian Crisis Toward a New Global Architecture,” address to the Parliamentary Assembly of the Council of Europe, Strasbourg, France, June 23.

    • Search Google Scholar
    • Export Citation
  • Camdessus, Michel, 1999, “The Private Sector in a Strengthened Global Financial System,remarks at the International Monetary Conference, Philadelphia, Pennsylvania, June 8.

    • Search Google Scholar
    • Export Citation
  • Camdessus, Michel, 2000, “Interview with FP Editor Moisés Naím,” Foreign Policy, Vol. 120 (September/October).

  • Commission on Global Governance, 1995, Our Global Neighbourhood (Oxford: Oxford University Press).

  • Cooper, Richard N., chairman, and others, 2000, “Report of the Quota Formula Review Group” to the IMF Executive Board, Washington, April 28.

    • Search Google Scholar
    • Export Citation
  • Council on Foreign Relations Task Force, 1999, “Safeguarding Prosperity in a Global Financial System: The Future International Architecture,” report of an independent task force with Carla Hills and Peter Peterson, co-chairs, and Morris Goldstein, project director ( New York: Council on Foreign Relations). Available via the Internet: www.cfr.org/public/pubs/IFATaskForce.html.

    • Search Google Scholar
    • Export Citation
  • Dawson, Thomas C., and Gita Bhatt, 2001, “The IMF and Civil Society Organizations: Striking a Balance,IMF Policy Discussion Paper 01/02 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • de Gregorio, José, Barry Eichengreen, Takatoshi Ito, and Charles Wyplosz, 1999, “An Independent and Accountable IMF,Geneva Reports on the World Economy, Vol. 1 (Geneva: International Center for Monetary and Banking Studies).

    • Search Google Scholar
    • Export Citation
  • Dobson, Wendy, 1991, Economic Policy Coordination: Requiem or Prologue? (Washington: Institute for International Economics).

  • Drees, Burkhard, and Ceyla Pazarbaşioğlu, 1998, The Nordic Banking Crisis: Pitfalls in Financial Liberalization, IMF Occasional Paper No. 161 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Finch, C. David, 1989, “The IMF: The Record and the Prospect,Essays in International Finance, No. 175 (Princeton, New Jersey: Princeton University Press).

    • Search Google Scholar
    • Export Citation
  • Fischer, Stanley, 1999, “On the Need for an International Lender of Last Resort,Journal of Economic Perspectives, Vol. 13 (Fall), pp. 85104.

    • Search Google Scholar
    • Export Citation
  • Fischer, Stanley, 2001a, “Priorities for the IMF,remarks to the Bretton Woods Committee, Washington, April 27. Available via the Internet: www.imf.org/external/np/speeches/2001/042701.htm.

    • Search Google Scholar
    • Export Citation
  • Fischer, Stanley, 2001b, “Asia and the IMF,remarks at the Institute of Policy Studies, Singapore, June 1. Available via the Internet: www.imf.org/external/np/speeches/2001/060101.htm.

    • Search Google Scholar
    • Export Citation
  • Ghosh, Atish, Timothy Lane, Marianne Schulze-Ghattas, Ales Bulír, Javier Hamann and Alex Mourmouras, 2002, IMF-Supported Programs in Capital Account Crises, IMF Occasional Paper No. 210 (Washington: IMF).

    • Search Google Scholar
    • Export Citation
  • Gil-Díaz, Francisco, and Agustín Carstens, 1996, “Some Hypotheses Related to the Mexican 1994-95 Crisis,Research Paper No. 9601 (Mexico City: Banco de Mexico).

    • Search Google Scholar
    • Export Citation
  • Gold, Joseph, 1972, Voting and Decisions in the International Monetary Fund (Washington: International Monetary Fund).

  • Gold, Joseph, 1977, Voting Majorities in the Fund: Effects of the Second Amendment of the Articles, IMF Pamphlet Series, No. 20 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Gold, Joseph, 1978, The Second Amendment of the Fund’s Articles of Agreement, IMF Pamphlet Series, No. 25 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Goldstein, Morris, 2001, “IMF Structural Conditionality: How Much Is Too Much?” videorecording from the IMF Institute Economics Training Program seminar, Washington, January 18.

    • Search Google Scholar
    • Export Citation
  • Guitián, Manuel, 1992, The Unique Nature of the Responsibilities of the International Monetary Fund, IMF Pamphlet Series, No. 46 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Haldane, Andy, and Mark Kruger, 2001, “The Resolution of International Financial Crises: Private Financing and Public Funds,Bank of Canada Working Paper No. 20 (Ottawa: Bank of Canada).

    • Search Google Scholar
    • Export Citation
  • Helleiner, Gerald K., 2001, “Markets, Politics and Globalization: Can the Global Economy Be Civilized?Global Governance: A Review of Multilateralism and International Organizations, Vol. 7 (July-September), pp. 24363.

    • Search Google Scholar
    • Export Citation
  • Henning, C. Randall, 1992, “The Group of Twenty-Four: Two Decades of Monetary and Financial Cooperation among Developing Countries,in International Monetary and Financial Issues for the 1990s, Vol. I (Geneva: United Nations Conference on Trade and Development).

    • Search Google Scholar
    • Export Citation
  • Horsefield, J. Keith, ed., 1969, The International Monetary Fund, 1945-1965: Twenty Years of International Monetary Cooperation (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Meltzer, Allan H., chairman, 2000, “Report of the International Financial Institutions Advisory Commission,” report to the U.S. Congress (Washington).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 1995-2000, Annual Report (Washington).

  • International Monetary Fund, various issues, International Capital Markets (Washington).

  • International Monetary Fund, various issues, World Economic Outlook (Washington).

  • James, Harold, 1996, International Monetary Cooperation Since Bretton Woods (Washington: International Monetary Fund; New York: Oxford University Press).

    • Search Google Scholar
    • Export Citation
  • James, Harold, 1998, “From Grandmotherliness to Governance: The Evolution of IMF Conditionality,” Finance & Development, Vol. 35 (December), pp. 4447.

    • Search Google Scholar
    • Export Citation
  • Kafka, Alexandre, 1996, “Governance of the Fund,” in The International Monetary and Financial System: Developing-Country Perspectives, ed. by Gerald K. Helleiner (New York: St. Martin’s Press).

    • Search Google Scholar
    • Export Citation
  • Kapur, Devesh, John P. Lewis, and Richard Webb, 1997, The World Bank: Its First Half Century, Vol. I (Washington: Brookings Institution).

    • Search Google Scholar
    • Export Citation
  • Köhler, Horst, 2000, Address to the Governors of the Fund, Prague, September 26. Available via the Internet: http://www.imf.org/external/np/speeches/2000/092600/htm.

    • Search Google Scholar
    • Export Citation
  • Köhler, Horst, 2001, “The IMF in the Process of Change,” statement at the Spring Meeting of the International Monetary and Financial Committee, Washington, April 29. Available via the Internet: www.imf.org/external/np/omd/2001/state.htm.

    • Search Google Scholar
    • Export Citation
  • Krueger, Anne, 2001, “International Financial Architecture for 2002: A New Approach to Sovereign Debt Restructuring,” address at the National Economists’ Club Annual Members’ Dinner, American Enterprise Institute, Washington, November 26.

    • Search Google Scholar
    • Export Citation
  • Lane, Timothy, and others, 1999, IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment, IMF Occasional Paper No. 178 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Lane, Timothy, and Steven Phillips, 2000, “Does IMF Financing Result in Moral Hazard?IMF Working Paper No. 00/168 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Lustig, Nora, 1996, Mexico in Crisis, the U.S. to the Rescue: The Financial Assistance Package of 1982 and 1995 (Washington: Brookings Institution).

    • Search Google Scholar
    • Export Citation
  • Masson, Paul R., and Michael Mussa, 1995, The Role of the IMF: Financing and Its Interactions with Adjustment and Surveillance, IMF Pamphlet Series, No. 50 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Polak, Jacques, 1991, “The Changing Nature of IMF Conditionality,Essays in International Finance, No. 184 (Princeton, New Jersey: Princeton University Press ).

    • Search Google Scholar
    • Export Citation
  • Polak, Jacques, 1997, “The World Bank and the IMF: A Changing Relationship,” in The World Bank: Its First Half Century, Vol. II, ed. by Devesh Kapur, John P. Lewis, and Richard Webb (Washington: Brookings Institution).

    • Search Google Scholar
    • Export Citation
  • Schinasi, Garry J., Burkhard Drees, and William Lee, 1999, “Managing Global Finance and Risk,Finance & Development, Vol. 36 (December), pp. 3841.

    • Search Google Scholar
    • Export Citation
  • Scholte, Jan Aart, 1998, “The IMF Meets Civil Society,Finance & Development, Vol. 35 (September), pp. 4245.

  • Stiles, Kendall W., 1990, “IMF Conditionality: Coercion or Compromise,World Development, Vol. 18 (July), pp. 95974.

  • Swoboda, Alexander, and others, 1999, “Reforming the International Financial Architecture,Finance & Development, Vol. 36 (September), pp. 24.

    • Search Google Scholar
    • Export Citation
  • Teunissen, Jan Joost, ed., 2000, Reforming the International Financial System: Crisis Prevention and Response (The Hague, Netherlands: Forum on Debt and Development).

    • Search Google Scholar
    • Export Citation
  • Torfs, Marjike, and James Barnes, 1991, Letter from Friends of the Earth-U.S. to the IMF Managing Director.

  • Wade, Robert, 2000, “Out of the Box: Rethinking the Governance of International Financial Markets,Journal of Human Development, Vol. 1 (February), pp. 14557.

    • Search Google Scholar
    • Export Citation
  • Woods, Ngaire, 1998, “Governance in International Organizations: The Case for Reform of the Bretton Woods Institutions,” in International Monetary and Financial Issues for the 1990s, Vol. IX (Geneva: United Nations Conference on Trade and Development).

    • Search Google Scholar
    • Export Citation
  • Woods, Ngaire, 2001, “Making the IMF and the World Bank More Accountable,International Affairs, Vol. 77 (January), pp. 83100.

  • Zalduendo, Eduardo A., 1986, “A Brief History of the Group of Twenty-Four,” (unpublished; Buenos Aires).

  • Zedillo, Ernesto, chairman, and others, 2001, “Report of the High-Level Panel on Financing for Development,” report to the United Nations, New York, June 28. Available via the Internet: www.un.org/reports/financing/panel.htm.

    • Search Google Scholar
    • Export Citation