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Causes of the economic crisis of 1994
History of Mexico

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Pre-Columbian Mexico
Spanish conquest
Colonial period
War of Independence
First Empire
First Republic
War with Texas
Pastry War
Mexican–American War
The Reform
Reform War
Frenchintervention
Second Empire
Restored Republic
Porfiriato
Revolution
La decena trágica
Plan of Guadalupe
Tampico Affair
Occupation of Veracruz
Maximato
Petroleum Nationalization
Mexican miracle
Mexico 68
La Década Perdida
1982 economic crisis
Zapatista Insurgency
1994 economic crisis
The end of PRI's hegemony--------------------------------------------------------------------------------
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The crisis is also known in Spanish as el error de diciembre — The December Mistake— a term coined by the then ex-president Carlos Salinas de Gortari. While these critics agree that a devaluation was necessary, they argue that the way it was handled was politically incorrect (although economically coherent). While the crisis took placeunder President Ernesto Zedillo, the causes are usually attributed to the policy actions and inactions of Carlos Salinas de Gortari's outgoing administration. Carlos Salinas de Gortari popularized the term "December Mistake" when he referred to Zedillo's sudden reversal of the former administrative policies of tight currency controls, "a mistake." The Salinas de Gortari's currency policy put a strainon the nation's finances.

As in prior election cycles, a pre-election disposition to stimulate the economy, temporarily and unsustainably, led to post-election economic instability. There were concerns about the level and quality of credit extended by banks during the preceding low-interest rate period, as well as the standards for extending credit. The country's risk premium was also affectedby an armed rebellion in Chiapas, causing investors to be wary of investing their money in an unstable region. The Mexican government's finances and cash availability were further hampered by two decades of increasing spending, debt loads, and low oil prices. Its ability to absorb shocks was hampered by its commitments to finance past spending.

Economists Hufbauer and Schott (2005) from theInstitute for International Economics have commented on the macroeconomic policy mistakes that precipitated the crisis:

1994 was the last year of the sexenio, or 6-year administration of Carlos Salinas de Gortari who, following the PRI tradition on an election year, launched a high spending splurge and a high deficit.
In order to finance the deficit (7% of GDP current account deficit), Salinasissued the Tesobonos, a type of debt instrument denominated in pesos but indexed to dollars.
Mexico experienced lax banking or corrupt practices; moreover, some members of the Salinas family collected enormous illicit payoffs.
The EZLN, an insurgent rebellion, officially declared war on the government on January 1; even though the armed conflict ended two weeks later, the grievances and petitionsremained a cause of concern, especially amongst some investors.[1]
Macroeconomics 5th Edition by Mankiw explains the country-risk issues precipitating the crisis:

The EZLN's violent uprising in Chiapas in 1994 along with the assassination of Presidential candidate Luis Donaldo Colosio made the nation's political future look less certain to investors, who then started placing a larger riskpremium on Mexican assets.
Mexico had a fixed exchange rate system that accepted pesos during the reaction of investors to a higher perceived country risk premium and paid out dollars. However, Mexico lacked sufficient foreign reserves to maintain the fixed exchange rate and was running out of dollars at the end of 1994. The peso then had to be allowed to devalue despite the government's previous...