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The Mexican Peso Collapse

Year: 1994-1995

Sudden devaluations of currencies are problematic for governments, and the peso collapse came amid a weak economy, very low oil prices, and a hangover from years of borrowing. The trigger, however, was Mexico’s decision to reverse the tight currency controls that had essentially made the peso a fixed currency.

The move coincided with the rollover of Mexico’s government debt and an armed rebellion in a southern state and led to the resignation of a finance minister (Jaime Serra Puchera at left). Spooked investors sold Mexican bonds, the central bank tried to defend the sinking peso, largely depleting its reserves. The government set a new — and much lower — fixed rate to the dollar but failed to assuage investors. The peso was allowed to trade freely, promoting a massive decline. The U.S. bought pesos to stabilize the situation and collaborated with the International Monetary Fund on a rescue package.

Photo: Gerardo Magallon | AFP | Getty Images