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CH83 | GSI
🕑 Added 2025-01-22 03:30:01 +0000 UTCSeok-won's shocking statement left Landon & Andrew unable to hide their bewilderment.
The peso had already dropped more than 10% due to speculative attacks.
And yet, to say that it would be halved from here was an idea too absurd to grasp.
Leaning forward in his seat, Landon asked incredulously, "Did you just say the peso would be halved?"
“That’s right,” Seok-won replied calmly.
Seok-won calmly picked up his teacup, took a sip, and placed it back down before continuing.
"What do you think is the root cause of the peso's collapse?"
"Obviously, it's the impact of the U.S. Federal Reserve's interest rate hike earlier this year, which struck the fixed exchange rate system linking the peso to the U.S. dollar," Landon replied.
“Exactly,” Seok-won said, nodding slightly before elaborating further.
“The Federal Reserve claimed that the rate hikes were intended to preemptively address inflationary pressures in the U.S. economy. However, considering the influence of the dollar as the world’s reserve currency, the impact was never going to be confined to the U.S.—it was bound to ripple across the globe.”
The enormous power of the U.S. and the dollar was undeniable, as evidenced by the recent carnage in global bond markets triggered by the rate hike.
‘There's even a saying that ‘When America sneezes, the rest of the world catches a cold.’
Over the coming years, the ripple effect of U.S. interest rate hikes would significantly trigger a series of economic crises in emerging markets.
“Raising interest rates effectively means tightening monetary policy. The abundant liquidity that had flooded the global markets during the low-interest era inevitably starts flowing back into the U.S.,” Seok-won explained.
“While U.S. Treasury bonds only offer 5–6% returns, Mexican government bonds guaranteed a 12–14% yield. So, as you said, Boss, Wall Street’s hot money naturally poured into Mexico,” Andrew added, glancing briefly at Seok-won seated at the head of the table.
The logic was simple: borrow cheaply in the U.S., invest in Mexican bonds, and pocket the double-digit yield difference. Only a fool would pass up such an opportunity.
Andrew continued, "But when the Fed began raising rates, this easy money strategy suddenly stopped working. In fact, the reversal of these capital inflows triggered the peso's slide."
Seok-won smirked faintly before chiming in.
"Adding to the turmoil, the assassination of a leading presidential candidate threw the country into political instability. Speculative forces took advantage of the chaos to push the peso further downward."
Landon shook his head.
"An old saying goes, 'When it rains, it pours,' and that seems to be the case here."
"The worst part for Mexico," Seok-won added, "is that the Fed has no intention of pausing its rate hikes anytime soon."
"Ugh."
Landon let out a groan, reluctantly agreeing with Seok-won’s assessment.
“True, the recent FOMC meeting raised interest rates again, pushing them past 4%.”
“The higher U.S. interest rates climb, the faster and larger the outflow of investments from Mexico will be,” Seok-won remarked.
If they were in the same situation, neither Landon nor Andrew would consider leaving their money in Mexico.
“Even if the Mexican central bank has $28.6 billion in foreign reserves, it won’t make a difference if the amount of hot money fleeing the country is several times larger.”
Andrew interjected with a hint of scepticism.
"Still, saying the peso will be halved seems like an exaggeration. The Mexican government isn’t foolish; they won’t just sit back and watch it happen."
Standing on the sofa, Landon nodded in agreement, seemingly sharing Andrew’s sentiment.
“As Wall Street predicts, the Mexican government won’t hold out much longer. They will likely abandon the fixed exchange rate system and devalue the peso soon.”
“Exactly.”
"That seems like the logical course of action, doesn’t it?"
Seok-won leaned back slightly, intertwining his fingers as his gaze met theirs.
"Under normal circumstances, yes. But the problem is that Mexico is currently in the middle of a presidential election."
“...!”
“To stabilize the crisis, they would need to do more than just abandon the fixed exchange rate system. They’d have to suppress wage increases, raise taxes, and simultaneously cut public spending. But can they do that during an election campaign?”
Landon exhaled deeply, shaking his head.
"Ugh. Mentioning any of that would make voters scatter like flies, so no one would dare take the initiative."
Andrew’s eyes sparkled with renewed interest, as he realized the situation in Mexico might be even worse than he had initially thought. He listened intently as Seok-won continued.
“On top of that, with the assassination of Luis Donaldo Colosio, the ruling party has lost its most prominent candidate. They’re now mired in internal conflicts and power struggles, leaving them with no capacity to address the situation. This will only worsen the chaos.”
As Seok-won spoke, memories of his previous life and a conversation with Manager Oh came to mind.
---
“Oh, newlywed, did you polish a lot of shoes today?”
Sitting alone in the cramped shoe shop, busy shining a line of freshly collected shoes, Seok-won looked up at the familiar voice.
Manager Oh approached, holding a paper bag in one hand and an unlit cigarette in his mouth.
“Come on, it’s been over a year since I got married. Stop calling me that.”
Manager Oh pulled over a slightly faded plastic chair with his familiar ease, sat down, and quipped playfully.
“Should I start calling you an old groom instead?”
“Enough already. Did you come here to shine your shoes?”
Seok-won shook his head, conceding defeat as he asked.
“Yeah. Just finish up what you’re doing first and take your time.”
Without needing any instructions, Manager Oh slipped off the shoes he had been wearing and swapped them for a pair of three-stripe slippers, as though he were at home. He moved around with the confidence of someone who knew exactly where everything was.
Seok-won glanced at the shoes Manager Oh had taken off. They were still relatively clean, with just a light layer of dust.
It made sense—they’d only been polished three days ago. It would’ve been strange if they were already dirty.
Although the shoes barely needed a quick dusting, Seok-won knew Manager Oh’s real reason for coming wasn’t about the polishing. It was about unwinding from the stress of stock trading while chatting about whatever was on his mind. Knowing this, Seok-won didn’t bother to point out the shoes’ condition.
“Would you like a cup of coffee?”
“Sounds good.”
Manager Oh responded eagerly, as if he had been waiting for the offer.
Putting down the shoes he had been holding and taking off his gloves, Seok-won turned in his chair toward the water bottle. He poured some into the electric kettle and pulled two sachets of instant coffee from a cardboard box.
He knew Manager Oh’s habit of always using two packets in a single cup, claiming one was too bland.
Once the water boiled, Seok-won poured it into a paper cup, stirred the coffee thoroughly, and handed it to Manager Oh.
“Here, stir it well before drinking.”
“Oh yeah,”
Taking the paper cup, Manager Oh blew on the hot coffee and sipped it, letting out a satisfied sigh.
“Ahh, nothing beats the coffee you make. I don’t know why our intern can’t seem to get it right.”
Wearing his gloves again, Seok-won picked up the shoes from the floor and replied casually.
“You know you can’t ask interns to do things like fetching coffee these days, right?”
“What do you take me for? Some kind of tyrant? I didn’t ask; they made it on their own.”
“Sure, sure.”
With a small grin, Seok-won wrapped a cloth tightly around his hand, dabbed it in black polish, and resumed cleaning the shoes.
After years of repeating the same motion, his movements were precise and efficient, devoid of any unnecessary gestures. Watching the process was oddly mesmerizing.
As Manager Oh sipped his coffee, his gaze landed on a newspaper folded in half nearby. He picked it up and, out of habit, turned straight to the business section. His eyes narrowed at a headline that caught his attention.
[Mexico’s Q1 Economic Growth Hits Post-Tequila Crisis Low]
“They’re at it again.”
Seok-won glanced briefly at the article Manager Oh was reading but kept polishing the shoes as he replied.
“I heard the economy’s already bad, and now the swine flu outbreak is making things worse.”
“When trouble hits, it’s always the weakest link that breaks first.”
Manager Oh folded the newspaper and placed it back down.
“You know what this ‘Tequila Crisis’ they’re talking about is, right?”
“Of course. It’s the financial crisis Mexico went through in the 1990s. They named it after Mexico’s famous liquor—tequila.”
“You’re sharp. Just like I taught you.”
“Of course, I learned from the best,” Seok-won quipped with a grin.
“Don’t get cocky, kid.”
Manager Oh smirked as he watched Seok-won.
When Seok-won shot him a playful glare, Manager Oh exhaled a puff of white cigarette smoke and chuckled.
“About two years after the Tequila Crisis, I went on a business trip to Mexico.”
“Oh, I remember. You brought back that weird wooden doll as a souvenir.”
“Yeah, yeah. So, do you still have it?”
Instead of answering, Seok-won raised his hand and pointed to the shelf to the left, where a TV sat.
On top of the TV stood a brightly coloured Indian wooden figurine.
“You rascal. You still kept it, huh?”
“I just put it up there because I didn’t have anywhere else to put it, then forgot about it.”
“Eh, doesn’t matter. It’s fine either way.”
Manager Oh gave a small laugh and downed the last of his coffee in one gulp before starting his story.
“You know that the Tequila Crisis was a precursor to the IMF financial crisis that hit later, right?”
“Yeah, that much is well-documented.”
Manager Oh tapped the cigarette ash into the empty paper cup, his face twisting into a bitter expression as he spoke.
“Even though two years had passed since the crisis, the situation I saw in Mexico during my business trip was truly unbelievable.”
“Was it that bad?”
Seok-won asked, lifting his head to look at him.
Despite the conversation, his hands kept busy, polishing the shoes.
“Yeah. The economy was in ruins and hadn’t recovered. The city was full of dangerous areas, and everywhere I went, homeless people were begging for change.”
“It sounds like Korea during the IMF crisis.”
“We were struggling too back then.”
Manager Oh pointed to the figurine on top of the TV.
“I bought that wooden doll from a native child who couldn’t have been more than 10 years old. He was selling them to tourists in front of the hotel, and I gave him 10 dollars for it.”
Seok-won, who hadn’t thought much of the figurine, turned his head and looked at it anew, realizing its significance.
“Back then, even though there was a lot of talk about Korea’s tough economic situation, I never thought it would get as bad as Mexico. But, wouldn’t you know it, less than half a year later, the IMF crisis hit us too.”
Manager Oh made a sound as though the air was slowly escaping from a tyre before asking,
“You know what’s really funny, though?”
“What’s that?”
Manager Oh snuffed out his cigarette in the paper cup with a flick of his hand.
“When you look at the situation that led to the financial crisis, Korea and Mexico have a lot in common.”
“What do you mean?”
At the unexpected story, Seok-won paused in the middle of polishing his shoes.
“When have you ever seen me lie?”
“Last week, didn’t you tell your wife you were going to a wake, but then went rock fishing with your friends instead?”
Manager Oh’s face twisted into an uncomfortable expression.
“You really remember everything, don’t you?”
Muttering to himself, Manager Oh cleared his throat and continued.
“Anyway! When the financial crisis hit, Mexico was in the middle of its presidential election. It was the same for us.”
“Oh, that’s true.”
In fact, while Korea was in the midst of electing its 15th president, the IMF crisis struck, having a decisive impact on the election results.
“One of the major opposition candidates was assassinated, and a lot of problems piled up at once. But the main reason Mexico nearly went bankrupt was because of the chaotic political situation and the government and central bank’s failure to act properly.”
Manager Oh clicked his tongue in frustration.
“And the more painful part is that despite watching Mexico’s situation so closely, Korea failed to prepare for a similar crisis just two years later and ended up facing the same disaster.”
“Oh…”
Seok-won also made a disappointed expression.
He wondered if Korea's officials had learned from the situation in Mexico, as Manager Oh suggested. Maybe, if they had, they could have avoided the IMF crisis.
Just then, a phone rang, and Manager Oh took his smartphone out of his pocket to answer the call.
"Hello? Oh, really? What? Okay."
After a brief conversation, Manager Oh hurriedly slipped on his shoes and said,
“The Director is urgently looking for me, so I have to head out right away.”
“Go ahead.”
Since the shoes were already clean, there was no need for further polishing.
Standing up, Manager Oh suddenly remembered something and handed Seok-won the paper bag he had placed nearby.
“Take this.”
Startled, Seok-won accepted the bag and tilted his head.
“What’s this?”
"Your wife told me she's expecting a baby, so I bought some baby items."
"You didn’t have to do that."
“Hey, it’s not for you; it’s for the baby. Anyway, I’m off.”
With a slight wave, Manager Oh rushed back into the company.
After a moment, Seok-won opened the paper bag and smiled when he saw the small, cute baby shoes inside.
The weight of the tiny shoes resting on his palm was something he would never forget in his lifetime.
---
As Seok-won reminisced, Andrew's voice snapped him back to the present.
"Given the unstable political landscape in Mexico," Andrew finally said, "there’s a chance things could turn out far worse than Wall Street anticipates."
Landon, his hands rubbing together, grinned slightly.
"If things go as you say, the situation might become even bigger than the one in the UK," Seok-won said with a deep smile, leaning against the back of the sofa.
"Even if, contrary to expectations, the Mexican government manages to prevent the worst-case scenario, the peso will still be weaker than it is now. So, there won't be any losses, just reduced profits."
If the game was one where there was no risk of losing, then there was no reason not to place the bet.
"Will you short just the peso?" Andrew asked, leaning slightly forward with a serious expression.
"When an economy is pushed to the brink, government bonds will crash too. We’ll short those as well."
"So, you're going to use leverage again, right?"
At Landon's question, Seok-won nodded without hesitation.
"Of course, that's the way to do it."
TL/n -
Following the assassination of Luis Donaldo Colosio in March 1994, the Mexican peso experienced significant volatility. Colosio's death sent shockwaves through the country, leading to political uncertainty and fears about Mexico's stability, especially in the context of the ongoing NAFTA (North American Free Trade Agreement) negotiations and the broader economic environment.
In the immediate aftermath of the assassination, the peso weakened sharply against the U.S. dollar. Investors became concerned about the political turmoil and its potential impact on Mexico's economy. The uncertainty surrounding the assassination and the potential for instability caused a loss of confidence in the peso.
**
After the assassination of Luis Donaldo Colosio in March 1994, the Mexican peso fell sharply, contributing to a period of financial instability. The peso's value dropped by around 15-20% against the U.S. dollar in the immediate aftermath of the event.
This depreciation was part of a broader trend of economic turmoil in 1994. In addition to Colosio's assassination, other factors such as the Zapatista uprising in Chiapas and the political uncertainties surrounding Mexico's transition of power contributed to market panic.
However, the most significant drop in the peso occurred later in the year, during the December 1994 crisis (known as the Tequila Crisis). The peso's value plummeted further after the government devalued the currency and announced a $50 billion bailout package to stabilize the economy. The peso's value fell by more than 40% during this period, reaching its lowest point in the aftermath of the crisis.
Initial drop after Colosio's assassination: About 15-20%.
Further decline in the aftermath of the Tequila Crisis: Over 40% depreciation by the end of 1994.
**
The Zapatista Uprising refers to a rebellion that began on January 1, 1994, in the southern Mexican state of Chiapas. It was led by the Zapatista Army of National Liberation (EZLN), a leftist, indigenous insurgent group. The uprising coincided with the day the North American Free Trade Agreement (NAFTA) went into effect, symbolizing the Zapatistas' opposition to neoliberal economic policies and the marginalization of indigenous communities in Mexico.
**
The Tequila Crisis refers to the Mexican financial crisis that unfolded in late 1994 and into 1995. It was named after the popular Mexican drink tequila due to the sharp devaluation of the Mexican peso, which had devastating consequences for the country's economy.
The crisis had several key causes and events that converged, contributing to its severity:
1. Political Instability:
The year 1994 was marked by political turmoil in Mexico, including the assassination of Luis Donaldo Colosio, the leading presidential candidate, and the Zapatista uprising in Chiapas, which created uncertainty about Mexico’s political stability.
These events caused investor panic, leading to capital flight from Mexico and a loss of confidence in the government’s ability to manage the economy.
2. Currency Devaluation:
Mexico had adopted a policy of fixing the peso to the U.S. dollar with a controlled exchange rate. By late 1994, however, the peso had become overvalued, and the government faced growing pressure to devalue it.
On December 20, 1994, the Mexican government, led by President Carlos Salinas de Gortari and his successor Ernesto Zedillo, announced a sudden devaluation of the peso by 15%. This decision sparked panic in the markets and sent the peso into a sharp decline.
3. Foreign Debt and Reserve Shortages:
Mexico had accumulated significant foreign debt during the 1980s and 1990s. When the peso started to lose value, the country faced a shortage of foreign reserves, which exacerbated the crisis.
The devaluation also led to a massive loss in the value of the peso relative to the dollar, making it more difficult for Mexico to service its foreign debt.
4. Investor Panic:
The announcement of the devaluation led to a loss of confidence among foreign investors. The Mexican government was forced to increase interest rates in an attempt to stem the outflow of capital, but this only led to further economic strain.
In addition to the peso's devaluation, there was also a sharp fall in stock markets, which deepened the economic crisis.
5. The U.S. Bailout:
To stabilize the situation and prevent the crisis from spreading further, the United States, along with the International Monetary Fund (IMF), intervened. In January 1995, the U.S. government, led by President Bill Clinton, approved a $50 billion rescue package for Mexico. This financial assistance was aimed at stabilizing the peso and restoring investor confidence.
6. Consequences:
The devaluation and ensuing crisis led to hyperinflation, with the inflation rate reaching 52% in 1995.
The Mexican economy entered a recession, with many businesses and individuals suffering significant financial losses.
The crisis also led to political and social unrest, as many Mexicans saw the devaluation as a result of poor government management and corruption.
7. Long-Term Effects:
While Mexico eventually stabilized through the rescue package and economic reforms, the Tequila Crisis left deep scars on the economy. It highlighted weaknesses in Mexico’s financial system and its reliance on foreign capital.
The crisis also led to reforms in Mexico's economic policies, including a shift away from fixed exchange rates and a more market-oriented approach.
