The rise of a great power: starting with military industry

Chapter 882: The Mexican Currency Crisis Erupts

mid-December.

Liu Tao came to Hong Kong.

In addition to dealing with some matters in Hong Kong this time, the most important thing is to short Mexico and some Latin American markets.

After all, the amount of funds mobilized is too large and Mexico cannot accommodate so much money.

This time, Liu Tao mobilized 100 billion US dollars, with a leverage of 50 times, which is 5000 billion US dollars.

Mexico is a small country and cannot withstand so much capital.

Since the signing of the North American Free Trade Agreement, Mexico has been favored by the whole world. It is believed that Mexico will develop rapidly in the future. In five years at the fastest and ten years at the slowest, Mexico can become a developed country.

After all, Mexico's advantages are too obvious. Compared with the United States and Canada, Mexico's labor costs are visible to the naked eye.

But no one expected that Mexico actually already had a huge crisis.

The development of finance not only promotes social development, but is also an important means of maintaining modern social order.

In a sense, the world is controlled by finance!
The financial industry affects every aspect of people's lives. Finance can create wealth, but it can also give rise to bubbles. The bursting of a country's financial bubble can subvert that country and even the world.

Financial security is actually an important part of national security. Financial sovereignty itself is a manifestation of a sovereign state.

In the 50 years after World War II, Mexico gradually established an industrialized national economic system by pursuing an active import substitution development policy, which was called the great power development model of an emerging industrial country by the international economics community.

As early as 1992, Mexico's per capita GDP reached US$3030, making it the second largest country in Latin America after Brazil.

Given the achievements of its economic reforms, Mexico has always been called a 'model' for economic reforms and a 'hotspot' for investment.

Coupled with the formation of the North American Free Trade Area, Mexico has a huge advantage. It is generally believed that it will only take a few years for Mexico to reach a per capita GDP of US$10000 and become a developed country.

But this is just a bright and beautiful appearance. In fact, a huge crisis has been brewing inside.

From 1980 to 1083, Mexico implemented a "crawling peg to the dollar" system, which is an exchange rate system that allows the currency to gradually appreciate or depreciate depending on inflation. In August 1982, the Mexican government was unable to repay its foreign debts, and the third world debt crisis that shocked the world kicked off. The Mexican debt crisis announced the failure of the "government-led economic system" and the "import substitution economic growth model."

1980~1989年墨西哥生产总值的年平均增值率仅为0.7%，人均国内生产总值低于人口增值率的水平。通货膨胀持续上升，1987年达到创纪录的159.2%的比率。

An inflation rate of 159.2%, how terrible!
In 1987, the Mexican government used the exchange rate as an anti-inflation tool, namely pegging the peso to the US dollar. Although the anti-inflation plan centered on pegging the exchange rate to the US dollar was relatively successful in reducing the inflation rate, the depreciation of the domestic currency was smaller than the increase in the inflation rate, so the overvaluation of the currency was inevitable, which would weaken the international competitiveness of domestic products.

It is estimated that the peso is overvalued by 20% when calculated using purchasing power parity.

This time, the anti-inflation plan also generated a consumer boom, expanding demand for imported goods. While imports increased sharply, Mexico's exports grew sluggishly. Between 1989 and 1994, exports grew 2.7 times, while imports grew 3.4 times.

As a result, Mexico's current account deficit widened from $1989 billion in 41 to $1994 billion in 289.

In the late 80s, the net amount of indirect investment flowing into Mexico was about US$50 billion per year, but by 1993, the net inflow of such foreign capital had reached nearly US$300 billion.

It is estimated that indirect investment accounted for as much as two-thirds of the total foreign investment inflows into Mexico from 1990 to 1994. In order to stabilize the confidence of foreign investors, the government not only insisted on not devaluing the peso, but also replaced a short-term bond pegged to the peso with a short-term bond pegged to the dollar. As a result, foreign investors sold a large number of short-term bonds pegged to the peso and bought short-term bonds pegged to the dollar.

So far, the Mexican government has issued short-term bonds totaling $300 billion, of which $167.6 billion will mature in the first half of next year, while Mexico's foreign exchange reserves are only a few billion dollars.

This means that the Mexican government has no ability to repay short-term bonds, and bond default is inevitable.

But all this was ignored.

Everyone was living in the dream of NAFTA and Mexico becoming a developed country.

In Hong Kong, through Internet trading, thousands of accounts spread across European countries, the United States, Singapore, Japan, South Korea, the Middle East, and various offshore islands began to short Mexico.

In fact, it is not just Liu Tao who is shorting Mexico. Soros and other big sharks have already opened their bloody mouths and pounced on Mexico.

In just a few days, late at night on December 1994, 12, the Mexican government suddenly announced that its currency, the peso, would depreciate by 19%.

This decision caused great panic in the market. Foreign investors frantically sold pesos and rushed to buy dollars, causing the peso exchange rate to fall sharply.

International hot money is like sharks smelling blood, excitedly pouncing on Mexico, ready to take a big bite of the fat meat from Mexico.

12月20日汇率从最初的3.47比索兑换1美元跌至3.925比索兑换1美元，狂跌13%。12月21日，再跌15.3%。

That is to say, in just two days, the exchange rate fell from the initial 3.47 pesos to 1 US dollar to 4.526 pesos to 1 US dollar, a drop of 30.43% in two days.

A 0.1% depreciation of the RMB is considered a catastrophe. A 30.43% drop in the peso is simply devastating.

As the peso depreciated, foreign investors withdrew funds in large quantities, and Mexico's foreign exchange reserves dropped sharply by nearly US$20 billion in just two days from the 21th to the 40st. Mexico's foreign exchange reserves were exhausted.

Mexico's entire financial market was in chaos.

From the 20th to the 22nd, in just three days, the exchange rate of the Mexican peso against the US dollar plummeted by 66.3%.

The capital outflow was like a drain on the Mexican stock market, which fell sharply. In just a few days, the IPC index of the Mexican stock market fell to 1500 points, a cumulative drop of 1994% from the highest point of 2881.17 points in 47.94, and it was still falling rapidly.

This time, Mexico's financial crisis spread rapidly.

Since the economic structures of Argentina, Brazil, Chile and other Latin American countries are similar to those of Mexico, and they all have economic problems such as heavy debt, trade deficit and overvalued currency to varying degrees, these countries were the first to be affected by the outbreak of the Mexican financial crisis.

As foreign investors feared that the Mexican financial crisis would spread to all Latin American countries, they sold stocks in these countries, causing a sharp drop in Latin American stock markets.

On the day when the Mexican currency crisis occurred, the stock indices of Latin American countries fell along with the Mexican stock index, with the Brazilian stock index falling 11.8%, Argentina falling 9.5%, and Chile falling 7.6%.

At the same time, the prices of various bonds issued by Latin American countries also plummeted. During the stock market crash, investors withdrew US$16 billion from Argentina and US$12.26 billion from Brazil, equivalent to 10% of the total foreign investment in Brazil. The entire Latin American securities market lost US$89 billion.

(End of this chapter)