Global debt crises follow a painful and familiar template. A rise in the cost of money reveals whose house is in order and who has been cutting corners. In 1994 under Alan Greenspan, and again this year under Kevin Warsh, the Federal Reserve surprised the world by reversing, raising short-term interest rates when they had been expected to cut, and pushing up the cost of longer-term money in the form of 10-year Treasury yields to the point when someone hits crisis.

In 2026, the victim appears to be France. It has too big a fiscal deficit for investors’ comfort, is wracked by political instability as a centrist president is due to stand down and lacks control over its own currency as a member of the euro zone. Three decades ago, these conditions applied to Mexico. It had borrowed too much, had just replaced Carlos Salinas de Gortari as president after a stormy election campaign in which the leading candidate was assassinated and had fixed the peso at an unrealistically high exchange rate to the U.S.

As we await the denouement in France, it’s easy to miss that this time the Mexican dog has not barked. Back in 1994, the Tequila Crisis unfolded as President Ernesto Zedillo’s new government tried to loosen the exchange rate a little, only for markets to swamp it by forcing a massive devaluation. The result was financial carnage. Inflation rose to more than 50% by the end of 1995, and when the dust had settled, half of Mexican banks’ assets had been written off.

These days, the currency floats and politicians are aggrieved that the markets push it upward. Its only moments of financial peril since 1994 emanated from beyond Mexican shores — the Global Financial Crisis of 2008 and the COVID-19 pandemic. The peso has even survived the stress test of six years’ rule by the left-populist president Andres Manuel Lopez Obrador, now followed by his chosen successor, Claudia Sheinbaum. His opening gambit of canceling a new airport for Mexico City, funded with international money and already under construction, had prompted many investors to leave.

As for inflation, it’s running at 3.45%, lower than the 3.75% in its big neighbor to the north. Mexico has macroeconomic stability and can withstand international crises. But it continues to grow painfully slowly and cannot escape what economists call the........

© The Japan Times