Custom «Latin America Financial Crisis» Essay Paper Sample

Latin America Financial Crisis

Mexico suffered a debt crisis after borrowing funds from foreign countries to facilitate their industrialization, specifically developing infrastructure. Eventually, the debt exceeded Mexico’s earnings and it could not be repaid. The signs of the crisis began showing when the world’s economy collapsed, because the oil prices shot up. Oil exporting countries had enough capital to provide loans for Mexico. Interest rates in the US and European countries increased that led to increment of the debts. The US dollar depreciated in value which extrapolated to Mexico owing it large quantities of money. In 1981 the world trade caused a great fall in Mexico’s exports making imports exceed what they could export. Over the years the debt accumulated and finally in 1982 the finance minister in Mexico declared that the country could not repay the debts. He suggested that the controlled limitations were restricted in lending more than ten times the bank’s capital in the US banking system, hence accelerating the crisis.

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The effects witnessed included retardation of the economy (Damaestri, 2003). Unemployment skyrocketed because there was a fall in the GDP per Capita. High levels of inflation observed reduced the purchasing power of the middle class people, because the value of the currency had depreciated and prices of stocks had declined. There was a large decline of equity prices with reference to Rojas-Suarez (1995), Brady bonds and bank deposits. High levels of poverty were observed and also a rise in international interest rates. Some crucial steps were implemented to curb the crisis which included adaptation of export policies for industrialization such that more exports were encouraged rather than imports. There was the Development of International Monetary Fund. Pop-Eleches (2009) says that the IMF was geared towards settlement of the debts. Collyns (2003) supported him.

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In accordance with Casanova (1993), the IMF’s aimed at proper allocation of resources to maximize on productivity. Relaying large amounts of cash outflow specifically to the US made the exchange rates reduce increasing the real rates of interest. This enabled Mexico to pay roughly 108billion dollars. “Rescue Loans” were taken to try to stabilize the economy.

After overcoming the dept crisis, a positive economic change has been observed over the years after the proper measures had been taken, including debt control associations. Currently Mexico has external debts worth 174300 US Dollars in line with the world fact book. For any country to avoid such debts, it is important for any government to increase exportation levels by providing subsidies to motivate domestic industries to produce. Such exports exceed imports always. Exploitation of the country’s resources to the optimum and fair allocation of these resources should be done so as to be able to sustain the country even without outsourcing loans.

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