The China Syndrome or the Tequila Crisis

The paper deals with the recent Mexican economic crisis from various perspectives. On a general plain an attempt is made to explain how moral hazard comes about and then how it intertwined with the way Mexican events unfolded. Its main thesis is that beyond flawed policies the root of monetary crises lies in incorrect institution building. Exchange rate policy is one such institution, the other, lending of last resort: the expectation by market participants that lurking in the background there is a central bank or an international institution with an open purse. The expectation that someone is ready to provide the liquidity that the market might not provides an incentive for imprudent or abusive behavior (creates moral hazard). Under this light an attempt is made to understand the causes of the deep economic breakdown Mexico experienced in 1995, almost a meltdown, with widespread international implications. The origins of this crisis can be traced to the expropriation of private commercial banks, to liberalization policies that otherwise would have been advisable but were combined with a defective privatization ant to decisions of the incoming (December 1995) Zedillo administration. A perfunctory presentation of the rescue process and its costs is presented before the paper ends with some considerations regarding a preventive economic policy built around the minimization or avoidance of moral hazard.