In itself, this event refers to the actions undertaken, in December 1994, by the incoming Secretary of the Treasury, Jaime Serra Puche. He decided, pressured by the lack of international reserves, to devalue the currency by raising the peso’s floating band by 15%.
The information spread and there was an immediate capital flight that, since it could not be sustained, ended with the free floating of the exchange rate. This increased the devaluation. The United States intervened with a loan for Mexico of 20 billion dollars, but under the condition of raising the interest rate.
The devaluation plus the rise in interest rates in banks left thousands of companies and families bankrupt and with unpayable debts.
But the December error was nothing more than the sad end of an artifice of public finances by the government of Carlos Salinas de Gortari. His government, to sustain economic growth and high social and clientele spending, resorted to public debt through Tesobonos.
The attraction of Tesobonos was that they functioned as an exchange hedge as they were payable in dollars. For this reason, Ernesto Zedillo’s government could not meet these obligations, with a semi-fixed exchange rate and the eminent shortage of dollar reserves. Because?
Because this way of attracting capital caused the peso to be artificially overvalued, something that became unsustainable. The devaluation was imminent, but it did not occur in an orderly manner and therein lies, according to specialists, Zedillo’s responsibility.
The resulting crisis is one of the worst in Mexico’s economic history, GDP contracted more than 6%, poverty and unemployment grew to levels from which the country could not immediately recover, and the financial effect spread to other countries: The Tequila effect.
