Part 3-III Section Outline

Development, the IMF, & Institutional Investors:
The Mexican Financial Crisis

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1. The IMF's Role Prior to the 1994-95 Mexican Financial Crisis
   1. The IMF's Original Mandate was to Supervise Fixed Exchange Rates and to Help Countries Maintain Balance of Payments Equilibrium.
   2. The Collapse of the Bretton Woods Par Value System Eliminated a Principal Function of the IMF.
   3. The IMF Searched for a New Role to Play on the World's Financial Stage and Moved Toward Greater Surveillance of Member Countries' Economic Policies.
   4. The IMF (and the World Bank) Took Center Stage During the Debt Crisis of the 1980s.
   5. The Break-up of the Soviet Union Provided Further Opportunity for the IMF to Expand its Mandate and Influence.
2. New Players on the World's Financial Stage: Institutional Investors
   1. The IMF and the World's Financial Regulators Must Now Deal with a New Type of Player in the World's Financial Markets: The Giant Private Institutional Investor.
      1. Institutional investors take different forms and have different investment strategies, such that some forms of institutional investments may pose greater risks than others.
      2. Institutional investors make investing safer and easier for the individual investor.
   2. Institutional Investors, Despite their Value to Individual Investors, Inject a Large Measure of Instability and Chaos into the World's Financial Markets.
      1. Institutional investors can wreak havoc when exhibiting herding behavior.
      2. Institutional investors can affect the value of a developing country's currency simply because of the sheer size of their investments.
3. CASE STUDY: Institutional Investors First Demonstrated Their Destabilizing Power in the Mexican Crisis of the 1990s
   1. Mexico Looked to Institutional Investors Because it had Only Recently Emerged from a Debt Crisis Involving Private Commercial Banks
   2. Institutional Investors Provided Mexico a Steady Supply of Capital to Drive Mexico's Renewed Economic Success
   3. A Currency Crisis Developed as Institutional Investors Pulled their Money out of Mexico, and the Mexican Government then had to Devalue the Mexican Peso.
   1. The Mexican crisis shows how, in today's world of giant institutional investors, balancing a current account deficit with a capital account surplus can mask trouble.
   2. With their size and prominence, institutional investors had an inordinate amount of political clout in Mexico.
   3. As capital fled, Mexico was left with no choice and had to devalue the peso.
4. Rescuing the Mexican Economy From the Crisis of 1994-95
   1. The U.S. Led the IMF Effort to "Save" Mexico and the Free-Market Model of Development.
   2. The United States and the IMF Provided Short-Term Credit to Help Solve the Liquidity Crisis.
   3. The United States' Plan Attempted to Return Mexico to the International Financial Markets.
5. The IMF's Post-Crisis Adjustments
   1. The IMF Instituted Special Data Dissemination Standards to Gather Consistent and Reliable Information about the Workings of Member Countries' Economies.
   2. The IMF Changed its Surveillance Procedures and Introduced an "Emergency Financing Mechanism" in Response to its Failure to Detect the Onset of the Mexican Financial Crisis.
   3. At the Urging of the World's Financial Community, the IMF Adopted New Arrangements to Borrow to Better Enable the Fund to Respond to Future Crises.

[Part Three Bibliography]

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