Historic Blunders

17th February 2006 at 00:00
It's 1994 in Mexico and business is booming. People are patting themselves on the back for electing Carlos Salinas, a Havard-educated economist, as president in 1988. When they're not out spending money that is. Salinas has relaxed controls on the financial sector. Many rather dodgy banks have been rather hastily privatised.

Previously frowned-upon foreign investment is pouring in. Inflation is in single figures for the first time in 20 years (it had reached 159 per cent) and the economy seems to be growing nicely. So people go shopping. They set up companies and buy land and property. Banks aren't too bothered who they lend to or how much they shell out.

Loans to private business have risen from less than zero in 1988 to $23 billion in 1993. Credit-card debt has risen by a third every year, but no one is worried. Until, that is, economic growth starts to slow and debt becomes a burden. Loans are not being paid off and the banks, some of whom don't have much in their own deposit accounts, start to squeak. The Government itself owes about $25 billion. Commentators warn that the peso is overvalued against the dollar and foreign currency speculators start sniffing around, keen to make a quick buck. But Salinas has fixed the exchange rate. He won't budge. At least not until he has to when he loses the presidential election in November.

His successor, Ernesto Zedillo, knows he has inherited an economic bubble that is about to pop. Abruptly he announces in December that he will let the peso float free against the dollar. They called it "el error de diciembre", but disaster will do. The currency instantly lost more than half its value. Foreign investors packed their bags and ran and no one tried to stop them. Inflation and interest rates started to soar. There were suicides and mass redundancies as businesses collapsed. Other Latin American economies suffered too in what became known as the Tequila effect.

Salinas, who everyone blamed for the crisis, was in Ireland at the time. He decided to stay there - presumably finding solace in the Guinness effect.

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