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What is the Mexican bailout?

When Ernesto Zedillo took office on December 1, 1994, he and his economic team decided that it was necessary to devalue the Mexican peso against the dollar. During the Salinas administration (1988-94), the government had allowed the peso to become heavily overvalued. Zedillo's advisers recommended that Mexico allow demand for the peso in the international market to determine its value rather than peg it at a fixed rate against the dollar. Government economists believed that the ratio of the peso to the dollar would stabilize somewhere between 15 and 20 percent of its previous rate. Instead, international investors holding Mexican pesos or debt quickly began selling off their pesos, leading to a significant decline in its value. Before 1994, Wall Street firms had purchased large amounts of Mexican debt that were known as cetes because of their significantly higher returns than other comparable debt instruments. The unstable political situation in Mexico after January 1994 led most of these firms to pressure the Mexican government to issue devaluation proof bonds known as tesebonos. Many of these bonds were short-term issues, and $10 billion of them came due in the first two months of Zedillo's administration. Zedillo's government did not have sufficient reserves to pay off all of these obligations in such a short period, and investors began rapidly selling off the bonds. Mexico requested assistance and received a loan from the US Treasury and the International Monetary Fund. Ultimately it was able to meet its obligations, and it paid back the loan early.

In spite of meeting its obligations, Mexico experienced a general economic crisis as capital was withdrawn from the country, inflation increased significantly, and economic growth declined, leading to high levels of unemployment. Numerous companies went out of business, and interest rates charged by private banks increased dramatically. It took Zedillo's government two years under an austerity program to return Mexico to a high rate of economic growth. Nevertheless, many Mexicans suffered from the downturn in the economy.

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