Edited by L. Randall Wray
Chapter 11: Foundering After Floating? Exchange Rate Management and the Mexican Stock Market, 1995–2001
Jesús Muñoz and P. Nicholas Snowden Introduction Domestic financial deficiencies have received increasing attention in diagnoses of the emerging market currency crises of the 1990s. Pegged exchange rates, together with moral hazard in the banking sector, are thought to have promoted both unhedged inflows and unsustainable indebtedness for bank borrowers. Broad consensus on the importance of these linkages has helped to promote a parallel accord on the need to replace pegged with floating exchange rates and to ensure strict prudential regulation of domestic banks. An implication of this reform agenda is that the comparative reliance of entities on bank debt finance will need to be reduced. Although force of circumstance renders this inescapable when banks become disinclined to lend in the aftermath of exchange rate re alignments, longer-term considerations lead to a similar conclusion. With flexible exchange rates thought to be essential in the presence of international financial flows, reliance on floating interest rate lending exposes heavily geared enterprises to sudden variations in debt service burdens when internat ional financial conditions change. A shift from such borrowing towards equity (or fixed interest bond) finance would therefore be desirable, not least for the increased freedom conferred on the monetary authorities to operate policy according to inflation or exchange rate stabilization needs. The purpose of the present study, therefore, is to examine the disappointing contribution of equity finance in the recovery from the first of the sequence of emerging market financial crises experienced in the 1990s: that of Mexico after...
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