{ "title": "Drawing Lessons from the Mexican Crisis: Preventing and Resolving Financial Crises--the Role of the IMF -- Address by Michel Camdessus", "publication": "IMF News, May 22, 1995", "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/spmds9508", "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/53/spmds9508", "overlayPath": "/en/news/articles/2015/09/28/04/53/spmds9508/index.md", "summary": "Speech given at the 25th Washington Conference of the Council of the Americas on "Staying the Course: Forging a Free Trade Area in the Americas", Washington, D.C.", "publishDate": "1995-05-22", "sections": [ { "heading": "Overview and context", "content": "- Speech given at the 25th Washington Conference of the Council of the Americas on \"Staying the Course: Forging a Free Trade Area in the Americas\", Washington, D.C., May 22, 1995.\n- Mexico (1988–1993) pursued macroeconomic stabilization and structural transformation with IMF support:\n - Tight financial policies and use of the exchange rate as a nominal anchor.\n - Comprehensive structural reforms, including privatization and trade and exchange liberalization.\n - Major restructuring of external debt.\n- Key outcomes prior to the crisis:\n - Inflation reduced from 160 percent in 1987 to 8 percent in 1993.\n - Economic growth recovered from an average not much higher than zero in 1985-88 to 3 percent in 1989-93.\n - Large increase in international reserves and resumption of access to international financial markets." }, { "heading": "How the crisis arose", "content": "- Pre-existing vulnerabilities at start of 1994:\n - External current account deficit running at 6 1/2 percent of GDP in 1993, financed largely by short-term capital inflows.\n - Steep real appreciation of the peso and deterioration in private sector saving performance.\n - IMF in February 1994 \"stressed the need to lower the external current account deficit...to reduce the economy's vulnerability to a sudden reversal in capital flows.\"\n- Adverse developments in 1994:\n - Domestic: uprising in Chiapas and a political hiatus following elections in August that delayed decisive policy response.\n - External: substantial rise in world interest rates prompting reassessment of emerging market exposures.\n- Policy choices that increased vulnerability:\n - Allowing the peso to depreciate within its band while replacing peso-denominated government debt with Tesobonos (instruments indexed to the U.S. dollar).\n - Current account deficit widened further to 8 percent of GDP for 1994 as a whole.\n- Crisis eruption in December 1994." }, { "heading": "How the crisis was resolved: program and financial package", "content": "- Confidence was not restored by the December 20 devaluation or the subsequent float; resolution required two components:\n 1. A stringent adjustment program designed in close collaboration with the IMF.\n 2. A large-scale international financial rescue package supporting that program.\n- Rescue package components:\n - IMF approved on February 1 an 18-month stand-by credit of $17.8 billion in support of Mexico's program for 1995-96, of which $7.8 billion was made available immediately.\n - $20 billion in swaps and guarantees from the U.S. Exchange Stabilization Fund (dependent on Mexico's IMF arrangement).\n - $10 billion of short-term support from the G-10 central banks through the BIS (Bank for International Settlements) (dependent on Mexico's IMF arrangement).\n- Rationale for exceptional support:\n - IMF mandate per Article I to make resources temporarily available under safeguards to correct balance-of-payments maladjustments without resorting to measures destructive of prosperity.\n - Risk of systemic repercussions and immediate spillovers to equity and currency markets in Latin America and other emerging markets.\n- Program objectives and early indicators:\n - Aim to cut the external current account deficit to less than 1 percent of GDP in 1995 and contain inflationary effects of the peso depreciation.\n - Program centered on further tightening the fiscal position and a strong monetary policy.\n - Continued privatization and liberalization, plus measures to protect the poorest from short-term adverse effects.\n - Early signs: trade balance in surplus in the first quarter (contrast with a $4.3 billion deficit in the same quarter of 1994); peso recovered from a low of 8.1 per dollar in early March to less than 6; easing of domestic interest rates indicating stabilizing financial situation." }, { "heading": "Lessons for economic policy (four emphasized lessons)", "content": "- Lesson 1: Openness to international financial markets imposes an obligation of unfailing discipline on economic policy.\n - Vigilance and discipline deter and defend against financial market setbacks.\n - Costly consequences when a country “lowers its guard.”\n - Example: Argentina's quick reaction to its problems helped contain systemic risk.\n- Lesson 2: Large external current account deficits are dangerous, especially when financed by short-term capital inflows and supporting domestic consumption.\n - Applies even when fiscal position appears strong and deficits reflect weak private saving.\n - Mexico’s fiscal position should have been even stronger to reduce dependence on reversible capital inflows.\n - Observation: during 1989-93 the United States, Canada, and Mexico were three of the four largest users of foreign capital in the world.\n- Lesson 3: Adjusting a pegged exchange rate is inherently difficult; sound and credible accompanying macroeconomic measures are essential to make a new exchange rate sustainable.\n- Lesson 4: Failure to publish timely information about key economic indicators increases crisis costs.\n - Lack of frequent publication on international reserves and other key variables contributed to markets being surprised at the devaluation." }, { "heading": "Lessons for the IMF and surveillance enhancements", "content": "- Fundamental task: strengthen IMF capacity to prevent and resolve crises in a globalized financial environment.\n- Surveillance role: annual consultations, Executive Board discussions on world economic outlook and global financial market developments.\n- Identified adaptations to make surveillance more effective:\n - First, data:\n - Stricter requirements for the regular and timely communication by countries to the IMF of data on key economic indicators.\n - Greater use of financial market data in monitoring developments.\n - Work toward establishment of standards for timely publication of economic data by members.\n - Second, more continuous policy dialogue:\n - Countries must keep the IMF informed and seek its opinion; IMF internal procedures must foster dialogue between regular consultations, especially after program completion.\n - Third, better focused surveillance:\n - Given limited resources, focus on countries at risk and those where financial tensions have spillover effects; focus more carefully on financial flows and their sustainability.\n - Fourth, more pointed and candid surveillance:\n - Fund must be prepared to be more critical and demanding in policy dialogue with members.\n- Challenges:\n - Political resistance: countries prefer surveillance over others more than over themselves.\n - Critical challenge for international policy cooperation and the IMF." }, { "heading": "IMF financing capacity agenda and policy proposals", "content": "- Current and near-term liquidity:\n - Recent large Fund arrangements (Mexico, Argentina, Russia, Ukraine) mean the Fund's liquidity, adequate at present, is projected to weaken considerably over the next two years.\n - Fund resources are probably sufficient for normal business during this period; the General Arrangements to Borrow (GAB) can be activated if emergencies call for it.\n- Longer-term proposals under consideration:\n - Eleventh General Review of Quotas:\n - Priority to initiate expeditiously; conclude by March 1998 at the latest, ideally before end of 1996.\n - Assessment: this quota review should in my assessment lead roughly to a doubling in quotas to keep pace with world economic growth since 1990 and increased scale of international financial flows.\n - Review role of the General Arrangements to Borrow and explore ways to increase potential resources available through borrowing from members.\n - Consider how the SDR could be instrumental in safety-net arrangements:\n - SDRs could be issued on a temporary basis or lent to countries in support of strong policy programs in a liquidity crisis.\n - Suggestion: consider the SDR idea with particular attention together with, but hopefully before, a wide-ranging review of the role and function of the SDR.\n - Ensure continued availability of concessional balance of payments assistance to low-income countries following expiration of ESAF:\n - One possibility: sale of a modest part of the Fund's gold holdings and use of earnings from invested profits of such sales, combined with bilateral contributions, to provide the needed subsidy element.\n - Explore arrangements for more orderly international debt adjustment, informed by experience with debt reorganization under national laws (work still exploratory).\n- Institutional and political context:\n - Interim Committee agreed on the need to strengthen resources; further consideration and action to follow.\n - Expectation that upcoming international meetings (Interim Committee guidance, G-7 Summit in Halifax) will give impetus and count on support of the United States." }, { "heading": "Broader implications and concluding points", "content": "- Financial globalization has increased benefits (efficient allocation of global savings, higher investment and growth) and risks (heightened vulnerability to shifts in market sentiment; faster transmission of disturbances across countries).\n- The Mexican crisis illustrates that crises can hit even successful, open economies integrated into global markets.\n- Reverting to closed systems with exchange controls would forgo benefits of globalization and is not the recommended response.\n- Global cooperation is essential in both trade and international monetary relations; regional cooperation is important but not sufficient.\n- The next major crisis of the 21st century will be of global significance; the IMF must be strengthened to match the needs of the global economy.\n\nSource: Address by Michel Camdessus, Managing Director of the International Monetary Fund, 95/8, May 22, 1995.\n\n---\n\n\n References\n\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/spmds9508" } ], "bullets": [ "[Markdown version](/en/news/articles/2015/09/28/04/53/spmds9508/index.md)", "[Structured JSON version](/en/news/articles/2015/09/28/04/53/spmds9508/index.json)", "[Bundle manifest](/en/news/articles/2015/09/28/04/53/spmds9508/bundle-manifest.json)", "Published: May 22, 1995", "Speech given at the 25th Washington Conference of the Council of the Americas on \"Staying the Course: Forging a Free Trade Area in the Americas\", Washington, D.C., May 22, 1995.", "Mexico (1988–1993) pursued macroeconomic stabilization and structural transformation with IMF support:", "Key outcomes prior to the crisis:", "Pre-existing vulnerabilities at start of 1994:", "Adverse developments in 1994:", "Policy choices that increased vulnerability:", "Crisis eruption in December 1994.", "Confidence was not restored by the December 20 devaluation or the subsequent float; resolution required two components:", "Rescue package components:", "Rationale for exceptional support:", "Program objectives and early indicators:", "Lesson 1: Openness to international financial markets imposes an obligation of unfailing discipline on economic policy.", "Lesson 2: Large external current account deficits are dangerous, especially when financed by short-term capital inflows and supporting domestic consumption.", "Lesson 3: Adjusting a pegged exchange rate is inherently difficult; sound and credible accompanying macroeconomic measures are essential to make a new exchange rate sustainable.", "Lesson 4: Failure to publish timely information about key economic indicators increases crisis costs.", "Fundamental task: strengthen IMF capacity to prevent and resolve crises in a globalized financial environment.", "Surveillance role: annual consultations, Executive Board discussions on world economic outlook and global financial market developments.", "Identified adaptations to make surveillance more effective:", "Challenges:", "Current and near-term liquidity:", "Longer-term proposals under consideration:", "Institutional and political context:", "Financial globalization has increased benefits (efficient allocation of global savings, higher investment and growth) and risks (heightened vulnerability to shifts in market sentiment; faster transmission of disturbances across countries).", "The Mexican crisis illustrates that crises can hit even successful, open economies integrated into global markets.", "Reverting to closed systems with exchange controls would forgo benefits of globalization and is not the recommended response.", "Global cooperation is essential in both trade and international monetary relations; regional cooperation is important but not sufficient.", "The next major crisis of the 21st century will be of global significance; the IMF must be strengthened to match the needs of the global economy.", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2015/09/28/04/53/spmds9508/index.md", "json": "/en/news/articles/2015/09/28/04/53/spmds9508/index.json", "bundleManifest": "/en/news/articles/2015/09/28/04/53/spmds9508/bundle-manifest.json" }, "generatedAtUtc": "2026-09-27T11:09:22.234Z" }