The Tequila Crisis: The Prelude to Europe’s Economic Storm

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

That men do not learn very much from the lessons of history is the most important of all the lessons of history.” Alduous Huxley

In its recent daylight plunder of the accounts of uninsured Cypriot (and Russian) depositors and its ruthless steamrolling of all political and social opposition in its way, the Troika has displayed, for all to see, its blatant disregard for personal property, democracy and the rule of law – arguably the three cornerstones of modern European civilization.

Even the most blindly trusting and optimistic of Europeans are finally beginning to see through the Troika’s grandmotherly countenance to its wolfish core. By contrast, to many Latin Americans, the international banking institutions’ lupine nature is all too familiar. Through painful experience, they have learned that when the real men in black come calling, bad things tend to happen.

During the lost decade of the 80s and the tumultuous first half of the 90s, many Latin American economies, including the now rising global superpower Brazil, were torn asunder and bled dry by a fatal cocktail of political ineptitude and corruption, and financial fraud and abuse – all of it facilitated and overseen by the IMF, now one of the leading protagonists in the Troika’s asset-stripping pillage of Europe.

In 1994, decades of economic mismanagement reached their nadir in the Mexican Tequila Crisis, an event which should have served – but patently didn’t – as a portent of the financial storms now buffeting Europe.

Act I

In the early nineties, Mexico’s central bank adopted a low-interest-rate regime that helped attract a surge of foreign speculative capital, primarily from U.S. investors and banks.

The consequences were all too predictable: with cheap money flowing as freely as bootlegged liquor at a Chicago speakeasy, the country’s banks – like those in pre-crisis Spain, Portugal or Ireland – drastically eased their lending standards. In time-honored fashion, the financial press applauded from the sidelines, dubbing the country’s spectacular debt-fuelled growth the “Mexican Miracle.”

U.S. investors stampeded southward, drawn by Mexico’s attractive interest rates and bullish investment returns. This speculative rush created its own momentum. The more investors shifted dollars south, the higher Mexican stocks climbed and the easier it became for Mexican companies and their government to borrow seemingly endless sums of dollars.

However, as with all easy-money-fuelled booms, the good times were short lived. By 1992, strains were already beginning to show as Mexico’s current account deficit more than doubled in the space of just a few years.  It took just two more years for the bubble to pop, helped along by a confluence of political and financial forces.

On Jan. 1, 1994, a group of Zapatistas led by el Subcommandante Marcos launched a short-lived revolution in the country’s southern province of Chiapas. Added to that, the assassination, months later, of two of the country’s most prominent political figures – then-President Carlos Salinas’ anointed successor, Luis Donaldo Colosio, and Ruling Institutional Revolutionary Party (PRI) Secretary General José Franciso Ruíz Massieu – began sowing serious doubts in investors’ minds as to the country’s political stability.

Fears were also growing that Salinas’ government would devalue the currency – which is precisely what his presidential successor Ernesto Zedillo Ponce de León did on taking office in December of the same year.

With the country fast hemorrhaging foreign funds – many of which moved north of the border to chase rising U.S. interest rates – Zedillo announced a 13 percent devaluation of the peso. Over the following months, the free-floating peso would lose almost 50 percent of its value against the dollar, wiping out the savings of much of the country’s middle class and raising fears that collapsing asset values would push Mexican banks over the edge.

Act II

So far, so normal – just another one of those sordid boom and bust tales to which we have become so enured these days. However, it was the events that directly followed Mexico’s fall from grace that stand out and which, in many ways, paved the way to what is happening in Europe today.

Clearly panicked by the potential ramifications of the Tequila Crisis for U.S. banks, the Clinton Administration quickly assembled a huge package of funds, ostensibly to bail out the Mexican financial system. After all, it was the least it could do to help its struggling neighbour.

The fact that Clinton’s then Treasury Secretary Robert Rubin was also a former co-chairman of Goldman Sachs, the vampire squid of recent lore, which just so happened to have aggressively carved out a niche for itself in emerging markets, especially Mexico, is obviously mere coincidence.

According to a 1995 edition of Multinational Monitor, Mexico was “first and foremost among Goldman Sachs’ emerging market clients since Rubin personally lobbied former Mexican President Carlos Salinas de Gortari to allow Goldman to handle the privatization of Teléfonos de México. Rubin got Goldman the contract to handle this $2.3 billion global public offering in 1990. Goldman then handled what was Mexico’s largest initial public stock offering, that of the massive private television company Grupo Televisa.”

But it wasn’t just the U.S. government that seemed determined to lend a helping hand to Mexico’s banks and, indirectly, their all-important creditors. The IMF also extended a package worth over 17 billion dollars – three and a half times bigger than its largest ever loan to date. The Bank of International Settlements (BIS) – the central bankers’ central bank – also got in on the act, chipping in an additional 10 billion dollars.

With such vast sums flowing in and out of Mexico, one can’t help but wonder where the money went and who ended up having to pay for it. In answer to the first question, Lawrence Kudlow, economics editor of the conservative National Review magazine, asserted in sworn testimony to congress that the beneficiaries were neither the Mexican peso or the Mexican economy:

“It is a bailout of U.S. banks, brokerage firms, pension funds and insurance companies who own short-term Mexican debt, including roughly $16 billion of dollar-denominated tesobonos and about $2.5 billion of peso-denominated Treasury bills (cetes).”

So, just as happened with the bailouts of Greece, Ireland and Portugal, money lent by the IMF and national governments was speedily channeled via the recipient country’s government and struggling banks to the coffers of some of the world’s largest private financial institutions. The money barely touched Mexican soil!

Financial institutions recouped all – or at least most – of the money they had gambled on Mexico during the boom years. So began the modern era of “no risk, all gain” moral hazard in global finance.

Yet although the Mexican bailout was, to all intents and purposes, a mere balance sheet trick, by which funds were transferred from U.S. taxpayers to U.S. banks and investors, via the Mexican financial system, the Mexican people were still left on the hook for the resulting debt (plus, of course, its compound interest). After all, someone has to pay for the banks’ generosity!

After unveiling a minimalist austerity plan in January that the markets dismissed as insubstantial, the Zedillo administration imposed a shock plan on March 9 that amounted to an all-out assault on Mexican businesses and consumers (sound familiar, fellow Europeans?)

With the stroke of a pen, sales tax increased from 10 to 15 percent, fuel prices by 33 percent and residential utility rates by 20 percent. The government also limited minimum wage increases to 10 percent, which, set against a backdrop of 50 percent inflation, inflicted a huge decline in the buying power of minimum wage workers. Government action also pushed interest rates on consumer credit up to 125 percent.


Even today, 19 years on from the onset of the crisis, the country continues to pay its pound of flesh for the toxic debt generated during the “miracle years.” According to recent estimates, between 1976 and 2000, the buying power of the country’s average minimum salary fell by a staggering 74 percent, and has since risen by a pitiful 0.5 percent. As in post-crisis Argentina, the country’s middle class has been decimated. And what little remains of it is on the tab for the more than 3 billion dollars of annual interest payments on the country’s debt.

For the big U.S. banks that helped fuel the Mexican miracle, the last 19 years have been somewhat kinder. Following their recent takedown of the U.S. economy in the sub-prime debacle, they are quite literally “too big to fail” and have their sights set on much larger prey.

It seems, with the benefit of hindsight, that the Mexican Miracle and Tequila Crisis were merely a test run for the end game now playing out in Europe. The question is: will the Europeans play along? Contributed by Don Quijones, of

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