The Mexican debt crisis

In 1976, Mexico suffered a serious economic downturn that was largely the result of failed domestic economic policy actions. However, the discovery of immense oil reserves and the tripling of international oil prices between 1979 and 1980 enabled Mexico to borrow vast sums of money in the international capital markets.

No sooner had Mexico incurred a foreign debt approaching $80 billion when oil prices began to fall precipitously in 1981. An overdependency on oil for export revenues, an overvalued exchange rate, rising debt service costs, expansionary fiscal and monetary policies that produced increasing inflation, and the rapid decline in oil-related revenues simultaneously came together to generate a severe economic crisis that began with Mexico's de facto default in August 1982.

Efforts to address these economic dislocations and to re-invigorate the shattered economy have been undertaken by Mexican officials since 1982. Improvements have been made in some areas, but the short-term health of Mexico"s economy remains inextricably tied to the international oil price. As long as the price of oil remains below $20 per barrel (roughly half the level prevailing in early 1981), Mexico's prospects appear quite bleak. Whether the efforts to restructure its export sector to emphasize manufactured goods sold to the United States will have significant long-term beneficial results remains to be seen.