Abstract:
The devaluation of the Mexican peso in December, 1994 roiled the world's financial markets. The possibility that the Mexican government might not be able to pay its obligations to bondholders--including international investors--threatened financial markets worldwide, particularly in developing nations in Latin America and Asia. Treasury Department officials in the U.S., with its 2000-mile border with Mexico and consequent fear of Mexican political and economic instability, would face a series of decisions as to whether to "bail out" Mexico by making available loan funds to prevent a Mexican public bankruptcy. This case recounts the history of the Mexican financial crisis, the intelligence available to Treasury and Federal Reserve Bank officials in advance of the devaluation, and the reasoning which led the Clinton Administration--despite Congressional opposition--to make $40 billion in loans available to the government of Mexico. The case allows for discussion of both macroeconomic policy--particularly the pros and cons of devaluation--and for discussion of the economic and political rationales for outside intervention in such circumstances. This case was prepared for Harvard University's Intelligence and Policy Project with support from the Central Intelligence Agency.
