Black December: Banking Instability, the Mexican Crisis, and Its Effect on Argentina (World Bank Latin American and Caribbean Studies)

In December 1994, Mexico, a nation considered a model of economic reform and good financial health, was suddenly bankrupt. The purpose of this paper is to discuss in general the main causes of banking distress and crises, and, in particular, the Mexican crisis and its aftershocks in Argentina. It discusses the anatomy of recent episodes of financial distress and crisis. Then it covers the traditional determinants of capital flows, emphasizing profitability and risk. The paper also provides background material describing the size, composition, and use of recent capital flows to Argentina, Chile, Brazil, and Mexico. It discusses whether current account deficits are a curse or a blessing. It also attempts to explain the Mexican crisis. Finally, the study discusses the aftershocks of the crisis and its impact on Argentina, which was greatly affected by the Mexican collapse.