The factors responsible for Mexican debt crisis in the 1980s - Essay Example

This problem soon spread to other developing countries in the world hence becoming a global debt crisis. It led to long term accumulation of commercial bank debts in the public sector. The factors responsible for the Mexico debt crisis of the 1980s can be broadly categorized into demand factors and supply factors. The demand factors are those that contributed to Mexico’s decision to seek for external financial aid hence contracting of many loans from commercial banks. The supply factors are those factors that enabled or encouraged commercial banks to lend money to Mexico and other developing countries.

These factors contributed directly or indirectly to Mexico’s contracting loans or more loans and incapacity to repay these loans. In the 1960s and 1970s, Mexico borrowed lots of money from international creditors. The money was to be used for purposes of industrialization especially development of infrastructure. At this time, Mexico’s economy was good. This motivated the creditors to continue providing loans. This increased Mexico’s rate of debt to commercial banks and consequently to increased debt service, that is, repayment of the principal and interests.

Later on, most of these loans were given on short term basis. This imposed a pressure of meeting loan maturation dates. External debt grew till it was 50% of its gross domestic product (GDP) in 1983 (Sebastian, 1996). According to (Rudiger, 1985), there was a general recession in the world economy in the 1970s and 1980s. This was caused by a sharp increase in the prices of oil which started in the year 1971. Oil prices increased because the fixed exchange rates system which the Bretton Woods innovated had failed.

This innovation had helped governments to free themselves from limitations presented to them by a fixed parity. Its role was to ensure that domestic demand was managed well so as to safeguard against haphazard increase in imports. As a result of