What was the cause of the Mexican Peso Crisis?

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pohnpei397 eNotes educator| Certified Educator

The major cause of the Mexican Peso Crisis of 1994 was political.  This was an election year in Mexico and the outgoing president, Carlos Salinas de Gortari, spent too much money trying to stimulate the economy to be sure that his party would win reelection.  His party, the PRI, had been in power for almost 70 years by that point but its hold on Mexico was weakening and it would end up losing the 2000 presidential election.

As the year went on, Mexico suffered three major blows that weakened public (and investor) confidence in its political system.  There was a major leftist rebellion in the south of the country.  There were also two high-profile political assassinations, one of the PRI's candidate for president, and one of another high PRI official, Salinas's brother-in-law.  These made people feel much less confident in investing in Mexico.

For these reasons, and because the peso was overvalued (it was set at a fixed exchange rate and Salinas did not want to devalue in an election year), investors became worried.  Money flowed out of Mexico to safer investments.  This outflow of cash, and the unwillingness of international lenders to renew Mexico's loans because of the instability, led to the peso crisis.