The international reserves of the Bank of Mexico were depleted, leading to a macro-devaluation due to the fixed exchange rate. The financial crisis was caused by excessive external debt and irresponsible domestic economic policy, marked by excessive public spending and unlimited money issuance, under a statist government led by populist presidents Echeverría and López Portillo.
The drop in oil prices interrupted the flow of credit, resulting in Mexico defaulting on its external debt. Despite having the North American Free Trade Agreement (NAFTA), the country was still burdened with enormous external debt and was not generating enough dollars to pay the credits.
The decade was marked by political assassinations, the emergence of the Zapatistas in Chiapas, and shocking kidnappings, leading to a capital flight. Banks, with a legal reserve requirement of 100%, allocated all pesos raised to government financing, leaving companies and individuals without resources.
In December 1994, Mexico faced a global mega-financial crisis known as the "Tequila Effect." Subsequently, the accusations and assertions against former president Ernesto Zedillo brought back memories of the financial crisis of 94-95, with the Fobaproa, bank bankruptcies, devaluation, and country indebtedness.
During the 1994 crisis, the Currency Risk Coverage Fund (Ficorca) allowed companies to hedge against future devaluations. Mexico was excluded from capital markets for almost a decade, and the privatized financial system collapsed, with poor crisis management.
Coordination between the governments of Mexico and the United States allowed for the restructuring of credits from American banks to Mexican companies, averting a more catastrophic scenario. Zedillo's financial team failed to control the situation, resulting in a new devaluation at the beginning of his term.
During the sexennium of Carlos Salinas de Gortari, Mexico experienced an internal boom of irresponsible credit. The devaluation led to a widespread technical bankruptcy of companies and banks due to exchange losses. Bank privatization resulted in high prices and lax leveraging schemes.
The rescue of depositors' savings through a protection mechanism during the crisis was effective, although the financial hole grew significantly. The lack of transparency in government actions generated distrust and capital flight. The crisis left Mexico mired in hyperinflation, recession, and distrust, but allowed companies to recover in subsequent years.
