Latin America Correspondent
Mexico's own wealthy elite, rather than US and other foreign investors, precipitated last December's devaluation and financial crisis by panic selling of their peso holdings, according to a report by the International Monetary Fund.
The report, part of the IMF's annual survey of global capital markets, conflicted with earlier theories by President Bill Clinton, the US Federal Reserve - and even IMF officials themselves - that foreign investors, jittery over Mexico's political problems, had sparked the Mexican crisis by dumping their peso holdings.
"The available data shows that the pressure on Mexico's foreign exchange reserves during 1994, and in particular just prior to the devaluation (on 20 December), came not from the flight of foreign investors or from speculative position-taking by these investors, but from Mexican residents," it said.
The IMF estimated that Mexicans, many of whom hold dollar bank accounts in US border towns, sold off pounds 3bn worth of stocks, bonds and pesos in December alone, representing more than two-thirds of that month's plunge in Mexico's foreign currency reserves.
This capital exodus set off a downward spiral in Mexican financial markets, forcing the devaluation. That, in turn, led to a withdrawal of foreign capital, threatening Mexico with insolvency and sending shock waves throughout Latin America. Most foreign investors began off-loading their peso assets only after the devaluation, the report said. It cautioned, however, that it is often difficult to distinguish precisely between domestic and foreign investment transactions.
Despite dire warnings at the time by Mr Clinton and others - including Robert Rubin, the US Treasury Secretary, the Fed's Alan Greenspan and Michel Camdessus, the IMF managing director - the report played down the extent of the threat that the Mexican crisis posed to the stability of the international financial system.
It suggested that the risk was less serious than during the 1982 debt crisis, when the potential default by Mexico and other Latin American nations threatened to put some of the world's top commercial banks out of business.
Large banks' direct exposure in Mexican debt is now comparatively small while institutional investors such as mutual funds and pension funds are large holders. Potential losses from a Mexican default after last December would therefore have been widely distributed through the international financial system.
The IMF also said that developing nations' financial markets functioned smoothly after the latest Mexican crisis; although they suffered losses, they were back to previous levels. "There was no evidence of freezing up, despite the fact that a number of equity markets were confronted with historically large price declines and large volumes," the report said.
The lesson? Developing countries must maintain the confidence of their own local investors as well as wooing the world's financiers, now that global financial liberalisation and changes in technology make it easier to move funds around.