After nearly a decade of stagnant economic activity and high inflation in Mexico, the Mexican government liberalized the trade sector in 1985, adopted an economic stabilization plan in late 1987, and gradually introduced market institution oriented policies. These reforms led to the recovery of economic growth, which averaged 3.1% per year between 1989 and 1994. In 1993, inflation was brought to single-digit levels for the first time in more than two decades. As economic reforms progressed, Mexico began to attract more foreign investment, a development aided by the absence of major restrictions on capital inflows, especially in the context of low US interest rates. Indeed, large capital inflows began in 1990, when a successful foreign debt renegotiation was formalized. The devaluation of the peso in December 1994 abruptly ended these capital inflows and precipitated the financial crisis. Regulatory failures, credit growth and the onset of the crisis The financial sector also underwent substantial liberalization which, when combined with other factors, encouraged an increase in the supply of credit of such magnitude and speed as to overwhelm weak supervisors, scarce capital some banks and even borrowers.[1] Several factors have helped facilitate the abundance of credit: (1) better economic expectations; (2) a substantial reduction in government debt;[2] (3) a phenomenal international availability of securitized debt (see Hale 1995); (4) a boom in real estate and the stock market; and (5) a strong private investment response. Poor selection of borrowers, excess credit volumes, and slowing economic growth in 1993 turned the debt of many into an excessive burden. Non-performing loan...... middle of paper...... al. (1996: 77-8) show that rapid credit growth and its consequences are not an exclusive feature of the Mexican crisis: "Kaminsky and Reinhart (1996) examined the experiences of 20 countries that experienced banking and balance sheet crises of payments and found that in about half the banking crisis preceded the balance of payments crisis was reversed in only a few cases. Therefore, there is support for the idea that the soundness of banks exerts negative effects on the external balance and on the exchange rate.'' Furthermore, ``All countries in the sample, except Venezuela, experienced a strong expansion of credit to the private sector before the crisis'' (Lindgren et al. 1996: 84). The experiences of the Czech Republic, Malaysia, Thailand, South Korea and others in 1997 should be added to the above list, as well as similar episodes of Sweden and other developed countries in 1992.